The Affluent Society (1958)

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THE AFFLUENT SOCIETY

By the same Author

★

AMERICAN CAPITALISM
THE GREAT CRASH, I929

Xhe Affluent
Society

BY

JOHN KENNETH GALBRAITH

Tlic economist, like et^cryotie else, must cottccrn
himselj' u/ith the ultimate aitns of man.

Alfred Marshall

HAMISH HAMILTON

LONDON

First published in Great Britain, 1958
by Hamish Hamilton Ltd
90 Great Russell Street London WCi

© 1958 by John Kenneth Galbraith

Second Impression, December 1958
Third Impression, February 1959
Fourth Impression, June 1959
Fifth Impression, March i960
Sixth Impression, September i960

PAINTED IN GREAT BRITAIN
BY WESTERN PRINTING SERVICES LTD BRISTOL

EMILY, PETER

AND

JAMIE

CONTENTS

FOREWORD
page xi

CHAPTER ONE

THE AFFLUENT SOCIETY
page 1

CHAPTER TWO

THE CONCEPT OF THE CONVENTIONAL
WISDOM

pages

CHAPTER THREE

ECONOMICS AND THE TRADITION OF DESPAIR

page i6

CHAPTER FOUR

THE UNCERTAIN REASSURANCE
page 26

CHAPTER FIVE

THE AMERICAN MOOD
page 37

vii

THE AFFLUENT SOCIETY

V

viii

CHAPTER SIX

THE MARXIAN PALL
page 30

CHAPTER SEVEN

INEQUALITY
page 61

CHAPTER EIGHT

ECONOMIC SECURITY
page 77

CHAPTER NINE

THE PARAMOUNT POSITION OF PRODUCTION

page 95

CHAPTER TEN

THE IMPERATIVES OF CONSUMER DEMAND

page log

CHAPTER ELEVEN

THE DEPENDENCE EFFECT
page 119

CHAPTER TWELVE

THE ILLUSION OF NATIONAL SECURITY
page 126

CHAPTER THIRTEEN

THE VESTED INTEREST IN OUTPUT
page 142

CONTENTS

IX

CHAPTER FOURTEEN

THE BILL COLLECTOR COMETH
page 154

CHAPTER FIFTEEN

INFLATION
page 164

CHAPTER SIXTEEN

THE MONETARY ILLUSION
page 176

CHAPTER SEVENTEEN

PRODUCTION VERSUS PRICE STABILITY

page 1S6

CHAPTER EIGHTEEN

THE THEORY OF SOCIAL BALANCE
page 195

CHAPTER NINETEEN

THE INVESTMENT BALANCE
page 210

CHAPTER TWENTY

THE TRANSITION
page 21 S

CHAPTER TWENTY-ONE

THE DIVORCE OF PRODUCTION

FROM SECURITY

page 227

X

THE AFFLUENT SOCIETY

CHAPTER TWENTY-TWO

THE REDRESS OF BALANCE
page 240

CHAPTER TWENTY-THREE

THE NEW POSITION OF POVERTY
page 251

CHAPTER TWENTY-FOUR

LABOUR, LEISURE, AND THE NEW CLASS

page 260

CHAPTER TWENTY-FIVE

ON SECURITY AND SURVIVAL
page 272

INDEX
page 278

FOREWORD

Since I sailed for Switzerland in the early sununer of 1955 to begin
work on this book I have accumulated a large and cosmopolitan set
of obligations. Thus a Guggenheim fellowship facilitated diat move-
ment as did my wife, Catherine A. Galbraidi. She also typed copy,
checked references, and revised proof and had a corrective influence
whai my skill in identifying problems too grossly exceeded my
facility in solving them. I am grateful to the librarians at the Palais
dcs Nations, as, at Harvard, for their help, and to the imiversity
students in Geneva on whom I first tried out die core of these ideas.
I also used many of these ideas in a series of lectures given under the
auspices of the Haynes Foundation at the California Institute of
Technology in January 1957 . 1 would like to thank the Foundation,
the Institute, and my long-time fliend Alan Sweezy for arranging this
trial run and for allowing publication in this form. The chapter on
poverty toward the end draws heavily on research financed by a
grant firom the Carnegie Corporation. My good fiicnd and assistant,
Rudi M. Parks, took responsibility for the whole tedious task of
manuscript preparation, for whidi I am also most grateful.

I have never quite imderstood why publishers, who are said to be
human, do not get tired of authors. Probably they do, but those with
whom I have been so happily associated conceal it with a rare and
kindly skill.

Two of my colleagues, Arthur M. Schlesingcr, Jr., and Carl
Elaysen, read the manuscript or proof, and I accepted nearly all of
their suggestions. I owe debt to the much larger group of people who,
by suggestion or persuasion, led me to problems or solutions I had
not previously seen. Thus my colleague Seymour £. Harris, the most

xi

Xil THE AFFLUENT SOCIETY n

s.

diligent and useful of all economists, began several years ago to
question the current stereotypes on public finance. Had it not been
for him, liberals would have been spared the present proposals for a
greatly expanded use of the sales tax. To go fardier afield. Governor
Luis Munoz-Maiin first persuaded me to question the wisdom of our
preoccupation with more and more consumer goods as a goal And
any number of odicr points, large and small, were stiggested to me
by colleagues, fiicnds, and students. Authorship of any sort is a
&ntastic indulgence of the ego. It is well, no doubt, to reflect on how
much one owes to others.

J. K. GALBRAITH

Cambridge, Massachusetts
March igsS

CHAPTER ONE

The Affluent Society

Wealth is not without its advantages and the case to the contrary,
although it has often been made, has never proved widely per-
suasive. But, beyond doubt, wealth is tlie relentless enemy of under-
standing. The poor man has always a precise view of his problem and
its remedy: he hasn’t enough and he needs more. The rich man can
assume or imagine a much greater variety of ills and he will be
correspondingly less certain of tlieir remedy. Also, until he learns to
live with his wealth, he will have a well-observed tendency to put it
to the wrong purposes or otherwise to make himself fooHsh.

As with individuals so witli nations. And the experience of nations
with well-being is exceedingly brief. Nearly all throughout all his-
tory have been very poor. The exception, almost insignificant in die
whole span of human existence, has been the last few generations in
the comparatively small comer of die world populated by Euro-
peans. Here, and especially in the United States, there has been great
and quite unprecedented affluence.

The ideas by which the people of this favoured part of the world
interpret their existence, and in measure guide their behaviour, were
not forced in a world of wealth. These ideas were the product of a
world in which poverty had always been man’s normal lot, and any
other state was in degree unimaginable. This poverty was not the
elegant torture of the spirit which comes from contemplating an-
other man’s more spacious possessions. It was the unedifying morti-
fication of the flesh— fixim hunger, sickness, and cold. Those who
mig^t be freed temporarily from such burden could not know when
it would strike again, for at best hunger yielded only perilously to

B I

2

THE AFFLUENT SOCIETY

privation. It is improbable that the poverty of the masses of the
people was made greatly more bearable by the feet that a very few—
those upon whose movements nearly all recorded history centres
—were very rich.

No one would wish to argue that the ideas which interpreted diis
world of grim scarcity would serve equally well for die contem-
porary United States. Poverty was the all-pervasive feet of that
world. Obviously it is not of ours. One would not expect that die
preoccupations of a poverty-ridden world would be relevant in one
where die ordinary individual has access to amenidcs— foods, enter-
tainment, personal transportation, and plumbing— in which not even
the rich rejoiced a century ago. So great has been the change that
many of the desires of die individual are no longer even evident to
him. They become so only as they arc synthesized, elaborated, and
nurtured by advertising and salesmanship, and these, in turn, have
become among our most important and taloited professions. Few
people at the beginning of the nineteoith century needed an ad-man
to tell them what they wanted.

It would be wrong to suggest that the economic ideas which once
interpreted the world of mass poverty have made no adjustment to
the world of affluence. There have been many adjustments, including
some that have gone unrecognized or have been poorly understood.
But there has also been a remarkable resistance. And the total altera-
tion in underlying circumstances has not been squarely faced. As a
result we are guided, in part, by ideas that are relevant to another
world; and as a further result we do many things that arc unnecessary,
sonic that are unwise, and a few that arc insane. We enhance substan-
tially the risk of depression and thereby the threat to our affluence itself.

II

The foregoing tells the purpose of this booL The first task is to see
the way our economic attitudes are rooted in the poverty, inequality,
and economic peril of the past. Then the partial and implicit accom-
modation to affluence is examined. The next task is to consider the
devices and arguments, some elaborate, some meretricious, some in a
d^ee dangerous, by idiich, in vital matters, we have managed to
maintain an association with the older ideas which stemmed ^m a

THE AFFLUENT SOCIETY 3

world where nearly all were poor. For no one should suppose that
there is anything convwiient or agreeable about the assumption of
affluence. On die contrary, it threatens the prestige and position of
many important people. And it exposes many of us to the even
greater horror of new thought. We face here the greatest of vested
interests, those of the mind.

Finally, as we escape from the obsolete and contrived preoccupa-
tions associated with the assumption of poverty, we arc able to sec for
the first time the new tasks and opportunities that are before us. This
is not as reassuring as it sounds. One of the best ways of avoiding
necessary and even urgent tasks is to seem to be busily employed on
things that are already done.

Such is the piupose. But first there is some preparatory work. For
we have not clung to obsolete and impalpable assumptions concern-
ing our society purely as the result of obtuseness and ignorance.
Powerful as these influences may be, they are not that strong. On the
contrary, in matters of social discussion, there are active and per-
vasive influences which bind us to the past and which, on occasion,
even cause us to try to recover the moribund. We must first be
aware of our captivity by these forces if we are later to engineer an
escape. That is the task of the next chapter.

Ill

No one will think this an angry book. Some may think it lacking in
that beguiling modesty which is so much in fiishion in social com-
moit. The reader will soon discover that I diink very litdc of certain
of the central ideas of economics. But I do think a great deal of the
men who originated these ideas. The shortcomings of economics are
not original error but imcorrected obsolescence. The obsolescence
has occurred because what is convenient has become sacrosanct.
Anyone who attacks such ideas must seem to be a trifle selfrconfident
and even aggressive. Yet I trust that judgments will not be too hasty.
The man who makes his entry by leaning against an infirm door gets
an unjustified reputation for violence. Something is to be attributed
to the poor state of the door.

Originality is something diat is easily exaggerated, especially by

THE AFFtUBNT SOCIETY

4

authors contemplating their o^ work. There are few thoughts in
this essay, or so I would imagine, which have not occurred to other
economists. The reaction of many will be to welcome the elaboration
of ideas to which evidence has already brought diem. But diesc are
also days in which even the mildly critical individual is likely to seem
like a lion in contrast with the general mood. These are the days
when men of all social disciplines and all poHdcal faiths seek die
comfortable and the accepted; when the man of controversy is
looked upon as a disturbing influence; whoi originality is taken to
be a mark of instability; and when, in minor modificadon of die
scriptural parable, the bland lead the bland. Those who esteem this
world will not enjoy this essay. Perhaps they should return it to the
shelf unread. For there are negative thoughts here, and they cannot
but strike an uncouth note in the world of positive thinking.

IV

No student of social matters in these days can escape feeling how
precarious is the existence of that with which he deah. Western man
has escaped for the moment the poverty wliich was for so long his
all-embracing fate. The uneardily light of a handful of nuclear
explosions would signal his return to utter deprivation if, indeed, he
survived at all. I venture to think that the ideas here ofiered bear on
our chances for escape from this fate. Illusion is a comprehensive ill.
The rich man who deludes himself into behaving Uke a mendicant
may conserve his fortune although he will not be very happy. The
affluent country which conducts its affliirs in accordance with rules of
another and poorer age aho forgoes opportunities. And in mis-
understanding itself it will, in any time of difficulty, implacably
prescribe for itself the wrong remedies. This the reader will discover
is, to a disturbing degree, our present tendency.

Yet it would be a mistake to be too gravely depressed. The prob-
lems of an affluent world, which does not understand itself, may be
serious, and they can needlessly threaten the affluence itself. But they
are not likely to be as serious as those of a poor world where the
simple exigencies of poverty preclude the luxury of misunderstand-
ing but where, also and alas, no solutions are to be had.

CHAPTER TWO

The Concept of the Conventional Wisdom

The first requirement for an understanding of contemporary eco-
nomic and social life is a clear view of the relation between events
and the ideas which interpret them. For each of these has a life of its
own, and much as it may seem a contradiction in terms eacli is
capable for a considerable period of pursumg an independent course.

The reason is not difficult to discover. Economic, like other social
life, does not conform to a simple and coherent pattern. On the con-
trary, it often seems incoherent, inchoate, and intellectually frustrat-
ing. But one must have an explanation or interpretation of economic
behaviour. Neither man’s curiosity nor his inherent ego allows him
to remain contentedly oblivious to anything that is so close to his
life.

Because economic and social phenomena arc so forbidding, or at
least so seem, and because they yield few hard tests of what exists and
what does not, diey afford to the individual a luxury not given by
physical phenomena. Within a considerable range he is permitted to
believe what he pleases. He may hold whatever view of this world he
finds most agreeable or otherwise to his taste.

As a consequence, in the interpretation of all social life there is a
persistent and never-ending competition between what is relevant
and what is merely acceptable. In this competition, while a strategic
advantage lies with what exists, all tactical advantage is with die
acceptable. Audiences of all kinds most applaud what they like best.
And in social comment the test of audience approval, far more than
the test of truth, comes to influence comment. The speaker or writer
who addresses his audience with the proclaimed intent of telling the

5

THE AFFIUENT SOCIETT

6

hard, shocking facts invariably goes on to expound what the
audience most wants to hear.

Just as truth ultimately serves to create a consensus, so in the short
run does acceptability. Ideas come to be organized around what the
community as a whole or particular audiences find acceptable. And
as the laboratory worker devotes himself to discovering scientific
verities, so the ghost writer and the public relations man concern
themselves with identifying the acceptable. If their clients are
rewarded with applause, these artisans arc qualified in their craft. If
not they have failed. However, by sampling audience reaction in
advance, or by pretesting speeches, articles, and other communica-
tions, the risk of failure can now be greatly minimized.

Numerous &ctors contribute to the acceptability of ideas. To a
very large extent, of course, we associate truth with convenience—
with what most closely accords widi self-interest and individual well-
being or promises best to avoid awkward effort or imwelcome dislo-
cation of life. We also find highly acceptable what contributes most
to selfesteem. Speakers before the United States Chamber of Com-
merce rarely denigrate the businessman as an economic force. Those
who appear before the AFL-CIO arc prone to identify social progress
with a strong trade union movement. But perhaps most important
of all, people approve most of what diey best understand. As just
noted, economic and social behaviour arc complex and mentally
tiring. Therefore we adhere, as though to a raft, to diose ideas which
represent our luiderstanding. Tins is a prime manifestation of vested
interest. For a vested interest in understanding is more preciously
guarded than any odier treasure. It is why men react, not infire-
quendy with something akin to religious passion, to the defence of
what they have so laboriously learned. Familiarity may breed con-
tempt in some areas of human behaviour, but in the field of social
ideas it is the touchstone of acceptability.

Because familiarity is such an important test of acceptabiUty, the
acceptable ideas have great stability. They arc liighly predictable. It
will be convenient to have a name for the ideas which are esteemed
at any time for their acceptability, and it should be a term that
emphasizes this predictability. I shall refer to these ideas henceforth
as the conventional wisdom.

THE EONCEPT OF THE CONVENTIONAL WISDOM

7

II

The conventional wisdom is not db.e property of any political group.
On a great many modem social issues, as we shall see in the coune of
this essay, the consensus is exceedingly broad. Nothing much divides
those who are liberals by common political designation from those
who are conservatives. The test of what is acceptable is much the
same for both. On some questions, however, ideas must be accom-
modated to the political preferences of the particular audience. The
tendency to make this ai^ustment, eidier deliberately or more often
unconsciously, is not greatly different for different political groups.
The conservative is led by disposition, not unmixed with pecuniary
self-interest, to adhere to the familiar and the established. These
underlie his test of acceptability. But the liberal brings moral fervour
and passion, even a sense of righteousness, to the ideas with which he
is most familiar. While the ideas he cherishes are di&rent feom those
of tlie conservative, he is not likely to be much less emphatic in
making familiarity a test of acceptability. Deviatio in the form of
originality is condemned as faithlessness or backsliding. A ‘good’
liberal or a ‘tried and true’ liberal or a ‘true blue’ liberal is one who
is adequately predictable. This means diat he forswears any serious
striving toward originality. In both die United States and Britain,
in recent times, Uberals and their British coimterparts of the left have
proclaimed themselves in search of new ideas. To proclaim the need
for new ideas has served, in some measure, as a substitute for them.

Thus we may, as necessary, speak of die conventional wbdom of
conservatives or the conventional wisdom of liberals.

The conventional wisdom is also articulated on aU levels of
sophistication. At the highest levels of social science scholarship some
novelty of formulation or statemrat is not resisted. On the contrary,
considerable store is set by the device of putting an old truth in a
new form, and minor heresies are much cherished. And the very
vigour of minor debate makes it possible to exclude as irrelevant, and
without seeming to be tuisdentific or parochial, any challenge to the
feamework itself. Moreover, with time and aided by the debate, the
accepted ideas become increasingly elaborate. They have a large

8

THE APPtUENT SOCIETY

literature, even a mystique. The defenders are able to say diat the
challengers of the conventional wisdom have not mastered their
intricacies. Indeed these ideas can be appreciated only by a stable,
orthodox, and patient man— in brief, by someone who closely
resembles the man of conventional wisdom. The conventional
wisdom having been made more or less identical with sound scholar-
ship, its position is virtually impregnable. The sceptic is disqualified
by his very tendency to go brashly from the old to the new. Were
he a sound scholar he would remain with the conventional wisdom.

At the same time in the liigher levels of the conventional wisdom
originality remains liighly acceptable in the abstract. Here again the
conventional wisdom often makes vigorous advocacy of originality
a substitute for originality itself.

Ill

As noted, the hallmark of die conventional wisdom is acceptability.
It has the approval of those to whom it is addressed. There are many
reasons why people like to hear articulated that which they approve.
It serves the ego: the individual has the satisfaction of knowing that
other and more famous people share his conclusions. To hear what he
believes is also a source of reassurance. The individual knows that he
is supported in his thoughts— that he has not been left behind and
alone. Further, to hear what one approves serves the evangelizing
instinct. It means that odiers are also hearing and are dicreby in
process of being persuaded.

In some measure die articulation of die conventional wisdom is a
religious rite. It is an act of affirmadon like reading aloud from die
Scriptures or going to church. The business executive listening to a
luncheon address on the virtues of free enterprise and the evils of
Washington is already penuaded, and so are his fellow listeners, and
all are secure in their convictions. Indeed, although a display of rapt
attention is required, the executive may not feel it necessary to listen.
But he does placate the gods by participating in the ritual. Having
been present, maintained attention, and having applauded, he can
depart feeling that the economic system is a little more secure.
Scholars gather in scholuly assemblages to hear in elegant statement

THE CONCEIT OF THE CONVENTIONAL WISDOM

9

what all have heard before. Yet it is not a negligible rite, for its pur-
pose is not to convey knowledge but to beatify learning and the
learned.

With so extensive a demand, it follows that a very large part of
our social comment— and nearly all that is well regarded— is devoted
at any time to articulating the conventional wisdom. To some extent
this has been professionalized. Individuals, most notably the great
television and radio commentators, make a profession of knowing
and saying with elegance and unction what Aeir audience will find
most acceptable. But in general the articulation of the conventional
wisdom is a prerogative of academic, public, or business position.
Thus any individual, on being elected president of a college or imi-
versity, automatically wins tlie right to enunciate the conventional
wisdom should he choose to do so. It is one of the rewards of high
academic rank, although such rank is also a reward for expounding
the conventional wisdom at a properly sophisticated level.

The high public official is expected, and indeed is to some extent
required, to expound the conventional wisdom. His, in many re-
spects, is the purest case. Before assuming office he ordinarily com-
mands little attention. But on taking up his position he is immediately
assumed to be gifted widi deep insights. He docs not, except in the
rarest instances, write his own speeches or articles; and diese arc
planned, drafted, and scrupulously examined to insure dieir accept-
ability. The application of any offier test, e.g. their eficctivencss as a
simple description of the economic or poHtical rcahty, would be
regarded as eccentric in die extreme.

Finally, the expounding of the conventional wisdom is the prero-
gative of business success. The head of almost any large corporation
—the United States Steel Corporation, General Motors, the Radio
Corporation of America— is entided to do so. And he is privileged
to speak not only on business policy and economics but also on the
role of government in society, the foundations of foreign policy,
and die nature of a liberal education. In recent years it has been urged
that to expound the conventional wisdom is not only the privilege
but also die obhgation of die businessman. ‘I am convinced that
businessmen must write as well as speak, in order that we may bring
to people everywhere the exciting and confident message of our

10

THE AFFLUENT SOCIETY

faith in the free enteiprise way of life. . . . Wliat a cliangc would conic
in this struggle for men’s minds if suddenly there could pour out
from the world of American business a torrent of intelligent, for-
ward-looking thinking.’^

IV

The enemy of the conventional wisdom is not ideas but the march of
events. As I have noted, the conventional wisdom accommodates
itself not to the world that it is meant to interpret, but to the audi-
ence’s view of the world. Since die latter remains with the comfort-
able and the familiar, while the world moves on, the conventional
wisdom is always in danger of obsolescence. This is not immediately
fatal. The fatal blow to the conventional wisdom comes when the
conventional ideas fail signally to deal widi some contingency to
which obsolescence has made them palpably inapplicable. This,
sooner or later, must be the fate of ideas which have lost their relation
to die world. At this stage the irrelevance will often be dramatized
by some individual. To him will accrue the credit for overthrowing
the conventional wisdom and for installing the new ideas. In £ict, he
will have only crystallized in words what the events have made clear,
although tins function is not a minor one. Meanwhile, like the Old
Guard, the conventional wisdom dies but does not surrender. Society
with intransigent cruelty may transfer its exponrats from the cate-
gory of wise man to diat of old fogy or even stuifrd shirt.

This sequence can be illustrated from scores of examples, ancient
and modem. For decades prior to 1776 men had been catching the
vision of die liberal state. Traders and merchants in England and in
the adjacent Low Countries, and in the American colonics, had
already learned that they were served best by a minimum of govern-
ment restriction rather than, as in the conventional wisdom, by a
maximum of government guidance and protection. It had become
plain, in turn, that liberal trade and commerce, not the accumulation
of bullion, as the conventional wisdom held, was the modern source
of national power. Men of irresponsible originaUty had made the

^C 3 atence B. Randall, A Creed for Free Enterprise (Boston, Atlantic-Little,
Brown, 195a). pp- 3 . 5 -

THE CONCEPT OP THE CONVENTIONAL WISDOM II

point. Voltaire had observed that *It is only because the English have
become merchiuits and traders diat London has surpassed Paris in
extent and in die number of its citizens; that the English can place
200 warships on the sea and subsidize allies.’^ These views were
finally crystallized by Adam Smith in the year of American indepen-
dence. The Wealth of Nations, however, continued to be viewed with
discontent and alarm by the men of the older wisdom. In the funeral
elegy for Alexander Hamilton in 1804, James Kent complimented
his deceased fiiaid on having resisted the ‘fuzzy philosophy’ of
Smidi. For another generation or more in all western countries there
would be solemn warnings that the notion of a liberal society was a
reckless idea.

Through the nineteenth century, Uberalism in its classical meaning
having become the conventional wisdom, there were solemn warn-
ings of the irreparable damage that would be done by Factory Acts,
trade unions, social insurance, and other social legislation. Liberalism
was a fabric which could not be ravelled without being rent. Yet the
desire for protection and security and some measure of equality in
bargaining power would not stay down. In the end it became a fact
with which the conventional wisdom could not deal. The Webbs,
Lloyd George, LaFollette, Roosevelt, Beveridge, and others crystal-
lized the acceptance of the new fact. The result is what we call die
welfare state. The conventional wisdom now holds that these
measures softened and civilized capitalism and made it touble.
There have never ceased to be warnings that the break with classical
liberalism was Eital.

Another interesting instance of the impact of circumstance on the
conventional wisdom was that of the balanced bucket in times of
depression. Almost from the beginning of organized government the
balanced budget or its equivalent has been the sine qua non of sound
and sensible management of the public purse. The spendthrift ten-
dencies of princes and r^ublics alike were curbed by the rule that
they must unfailingly take in as much money as diey paid out. The
consequences of violating this rule had always been unhappy in
the long run and not in&equoidy in the short. Andoidy it was

^ 'Tenth Philosophical Letter.’ Quoted by Henri S^, Modem Capitalism (New
York, Adelphi, 1928), p. 87.

12

THE AFFLUENT SOCIETY

the practice of states to cover the deficit by clipping or debasing the
coins and spending the metal so saved. The result invariably was to
raise prices and lower national self-esteem. In modem times the issue
of paper money or the obtaining of soft loans fi:om banks had led to
the same results. As a result, die conventional wisdom had never
emphasized anything more strongly dian the importance of an
annually balanced budget.

But meanwhile the underlying reality had gradually changed. The
rule requiring a balanced budget was designed for governments diat
were inherendy or recurrendy irresponsible on fiscal matters. Until
the last century there had been no other. Then in the United States,
England and the Britisli Commonwealth, and elsewhere govern-
ments began to calculate the fiscal consequences of their actions.
Safety no longer depended on confining them within arbitrary rules.

At about the same time, dierc appeared the phenomenon of the
truly devastating depression. In such a depression men, plant, and
materials were unemployed en masse; die extra demand from the
extra spending induced by the deficit— the counterpart of the extra
metal made available firom the clipped coinage— did not raise prices
uniquely. Rather it mosdy returned idle men and plant to work. The
effect, as it were, was horizontally on production rather than verti-
cally on prices. And such price increases as did occur were far from
being an immitigated misfortune; on the contrary’, they retrieved a
previous, painful decline.

The conventional wisdom continued to emphasize the balanced
budget. Audiences continued to respond to the warnings of the
disaster which would befall were this rule not respected. The shatter-
ing circumstance was the Great Depression. This led to a severe
reduction in the revenues of the federal government; it also brought
increased pressure for a variety of reUef and welfare expenditures.
A balanced budget meant increasing tax rates and reducing public
expenditure. Viewed in retrospect, it would be hard to imagine a
better design for reducing both the private and the public demand for
goods, aggravating deflation, increasing imemployment, and adding
to the general sufiering. In the conventional wisdom, none the less,
the balanced btidget remained of paramount importance. President
Hoover in die early thirties called it an ‘absolute necessity’, ‘the most

THE CONCEPT OF THE CONVENTIONAL WISDOM 13

essential factor to economic recovery’, ‘the imperative and iimnedi-
ate step’, ‘indispensable’, ‘the first necessity of the Nation’, and ‘the
foundation of all public and private financial stabiUty’.^ Economists
and professional observers of public affairs agreed almost without
exception. Almost everyone called upon for advice in the early years
of the depression was impelled by die conventional wisdom to offer
proposals designed to make things worse. The consensus embraced
both hberals and conservatives. The Roosevelt Administration was
also elected in 1932 with a strong commitment to reduced expendi-
tures and a balanced budget. In his acceptance speech in 1932 Roose-
velt said, ‘Revenue must cover expenditures by one means or
another. Any government, like any family, can for a year spendalitdc
more dian it earns. But you and I know that a continuation of that
habit means the poorhousc.’ One of the early acts of his Administra-
tion was an economy drive wliich included a horizontal slash in
pubhc pay. Mr. Lewis W. Douglas, through a distinguished hfe a
notable exemplar of the conventional wisdom, made the quest for a
balanced budget into a personal crusade and ultimately broke with
die Administration on the issue.

In fact, circumstances had already triumphed over the conven-
tional wisdom. By die second year of the Hoover Administration the
budget was irretrievably out of balance. In die fiscal year ending in
1932, receipts were much less than half of spending. The budget was
never balanced during die depression. But not until 1936 did both the
necessities and advantages of this course begin to triumph in the field
of ideas. In that year, Jolui Maynard Keynes launched his formal
assault in The General llieory of Employment, Interest and Money.
Thereafter the conventional insistence on the balanced budget under
all circumstances and at all levels of economic activity was in retreat.
Keynes, as we shall see presendy, was also on his way to constructing
a new body of conventional wisdom, die obsolescence of some parts
of whicli, in its turn, is now well advanced.

^ Arthur M. Schlesingcr, Jr., TIk Crisis of the Old Order (Boston, Houghton
Mifflin, 1956), p. 232.

14

THE AFFLUENT SOCIETY

V

In the following pages there will be frequent occasion to advert to the
conventional wisdom— to the structure of ideas that is based on
acceptability— and to those who articulate it. These references must
not be diought to have a wholly invidious connotation. (The warn-
ing is necessary because, as noted, we set great ostensible store by
intellectual innovation though in fact we resist it. Hence, though we
value the rigorous adherence to conventional ideas, we never acclaim
it.) Few men are unuseful and the man of conventional wisdom is
not. Every society must be protected from a too facile flow of
thought. In the field of social comment a great stream of intellectual
novelties, if all were taken seriously, would be disastrous. Men would
be swayed to diis action or that; economic and political life would be
erratic and rudderless. In the Communist countries stabiUty of ideas
and social purpose is achieved by formal adherence to an officially
proclaimed doctrine. In our society a similar stability is enforced far
more informally by the conventional wisdom. Ideas need to be tested
by their ability, in combination with events, to overcome inertia and
resistance. This inertia and resistance the conventional wisdom pro-
vides.

Nor is it to be supposed that die man of conventional wisdom is an
object of pity. Apart firom his socially useful role, he has come to
good terms with life. He can think ofhimsclf with justice as socially
elect, for society in fact accords him the applause which his ideas are
so arranged as to evoke. Secure in this applause he is well armed
against the annoyance of dissent. His bargain is to exchange a strong
and even lofty position in the present for a weak one in the future.
In the present he is questioned with respect, if not at great length, by
Congressional Committees; he walks near the head of the academic
processions; he appears on symposia; he is a respected figure at the
American Assembly; he is hailed at testimonial banquets. He risks
being devastated by hostile events. But by then he may be dead. Only
posterity is unkind to the man of conventional wisdom, and all
posterity does is bury him in a blanket of neglect. However, some-
what more serious issues are at stake.

THE CONCEPT OF THE CONVENTIONAL WISDOM

VI

No society seems ever to have succumbed to boredom. Man has
developed an obvious capacity for surviving die pompous reiteration
of the commonplace. The conventional wisdom protects the con-
tinuity in social thought and action; in the immediately following
chapters wc shall see how great this continuity is. But dierc arc also
grave drawbacks and even dangers in a system of diought which by
its very nature and design avoids accommodation to circumstances
until change is dramatically forced upon it. In large areas of economic
adairs the marcli of events— above all, the increase in our wealth and
popular well-being— has again left the conventional wisdom sadly
obsolete. It may have become inimical to our happiness. It has come
to have a bearing on the larger questions of civilized survival. So
while it would be mudi more pleasant (and also vastly more profit-
able) to articulate the conventional wisdom, this book involves the
normally unfruitful effort of an attack upon it. I am not wholly
barren of hope, for circumstances have been dealing die conventional
wisdom a new series of heavy blows. It is only after such damage has
been done, as we have seen, that ideas have their opportunity.

Keynes, in his most famous observation, noted that wc arc ruled by
ideas and by very little else. In die immediate sense this is true. And
he was right in attributing importance to ideas as opposed to the
simple influence of pecuniary vested interest. But the rule of ideas is
only powerful in a world that does not diange. Ideas are inherently
conservative. They yield not to the attack of other ideas but to the
massive onslaught of circumstance widi which they cannot contend.

CHAPTER THREE

Economics and the Tradition of Despair

Economics, not entirely by accident, became a subject of serious
study at an important turning-point in tlie history of western man.
This was when the wealth of national communities began, for the
first time, to show a steady and persistent improvement. This change,
which in advanced countries like England and Holland came some
time in the eightecntli century, must be counted one of die momen-
tous events in die history of the world. ‘From the earliest times of
which we have record— back, say, to two thousand years before
Christ— down to the begimiing of die cighteendi century, there was
no very great change in the standard of hAdng of the average man
living in die civilized centres of the earth. Ups and downs certainly.
Visitations of plague, famine and war. Golden intervals. But no pro-
gressive violent change.’^

Some of die intervals had been extended. For something over a
century in medieval England— from perhaps 1380 to 1510— workers
or at any rate skilled artisans seem to have enjoyed a period of con-
siderable prosperity. But as always before, the good times came to an
end; by the close of the sixteenth century the purchasing power of an
artisan’s wage had fallen by more than half. It remained low through
the disorders of the Civil War, and progress was uncertain for a long
time thereafter. Then early in die last century diese wages began the
rise which, with slight interruption, has since continued.®

M. Keynes, Essays in Persuasion. Economic Possibilities for Our Grand-
children. (London, Macmillan, 1931), p. 360.

® E. H. Phelps Brown and Sheila V. Hopkins, ‘ Seven Centuries of the Prices of
Consumables, Compared widi Builders* Wage Rates.* Economica, New Series;
vol. XXni, no. 92 (November 1956).

16

ECONOMICS AND THE TRADITION OF DESPAIR

17

There were reasons for the age-old stagnation as there were also
reasons for the change. The productivity of an economy based on
agriculture and household industry had inherent limits. And before
the appearance of the national state any surplus diat might be accu-
mulated was subject to the spoliation of diverse anned marauders
and might, in fact, attract their attention.

In the latter part of the eighteenth century the factory began to
replace the household at an accelerating rate as the centre of produc-
tive activity. Output per man-hour was no longer limited by the
simple technology and the small capital of the household and by the
need to rely mostly on human or animal power. The new national
states had begun to make effective die guarantee of internal order.
Armies would still cross national frontiers and with considerable
capacity for doing damage where they fought and trod. But the
economic consequences of national armies in the age of nationalism
have been almost infinitely small as compared with the damage
wrought by feudal, marauding, or crusading armies in die centuries
before. Within a few years following die two World Wars the
standard of living of Western European countries, even those that
were defeated and devastated, was higher than ever before. The eco-
nomic life of the Middle East never recovered from the imaginative
and highly co-ordinated destruction, pillage, and massacre of Genghis
Khan. In contrast with recent experience, Germany required a hun-
dred years to recoup the destruction and disorganization of the
Thirty Years War. However, a future national war might well bring
destruction abreast of the ancient art.

But it would have been surprising if, as the conditions of life gradu-
ally improved in the eighteenth and nineteentii centuries, man had
quickly forsaken the lessons of all the preceding ages and supposed
this improvement to be permanent. This was all the more impro-
bable for, in the early years of the hidustrial Revolution, the rewards
of increased efficiency were distributed very unequally. It was the
wealth of the new entrepreneun, not tiiat of their workmen, which
was everywhere celebrated. Those who owned the new factories, or
the raw materials or railways or banks that served them, lived in
mansions by whidi the century is still marked. Hieir workers lived
in dark and noisome hovek, crowded on dirty and unpaved streets

l8 THE AFFLUENT SOCIETY

along which naissionaries and social reformers ventured with a con-
siderable sense of their own courage. And in the £u:tories themselves
tlie old and the very young worked &om early to late and for a
pittance. In England in the first half of the nineteenth century both
total production and output per person were rising rapidly. The
number of people of means was increasing. So, too, as the mid-
century approached, were real wages. But the improvement in the
position of the masses was far less evident than the increase in indus-
trial and mercantile wealdi. If the poor were becoming less poor, this
change was slight as compared with the growing contrast between
tlie rich and the poor.

Economic ideas began to take their modem form in the late
eighteenth and early nineteentli centuries. It was against tliis back-
ground of centuries-old stagnation relieved now by increasing
wealth, but wealth not of the many but the few, that they were first
worked out and offered. Economists would indeed have been
indifferent to bodi history and environment had they not taken the
privation and economic desolation of the masses for granted. In
economics misfortune and failure were normal. Success, at least for
more than the favoured few, was what had to be explained. Enduring
success was at odds widi all history and could not be expected. This
was the legacy of circumstances to ideas. As we shall see, it has
enjoyed a remarkable vitality.

II

In the history of economic thought Adam Smith (1723-90), the first
great figure in the central economic tradition,^ is counted a hopeful
figure. In an important sense he was. His vision was of an advancing
national community, not a stagnant or declining one. His tide An
Inquiry into the Nature and Causes of the Wealth of Nations had an

^ I have used the phrase ‘central tradition’ to denote the main current of ideas in
descent from Smith. The more common reference to the ‘classical tradition’ is ruled
out by a difference of opinion, in my opinion a rather futile one, as to whether
classical economics should or should not be considered to have ended with John
Stuart Mill and J. £. Caitnes. Another possible reference is to the orthodox tradi-
tion. But this, by implication, excludes those like Keynes who, thoi^ working in
the same current of ideas, have taken sharp issue with accepted contusions.

ECONOMICS AND THE TRADITION OF DESPAIR jg

obvious overtone of opulence and well-being. He offered an all but
certain formula for economic progress. This was the liberal economic
society in which regulation was by competition and the market and
not by the state, and in which each man, dirown on his own resources,
laboured effectively for the enrichment of the society.

But it was of aggregate wealth that Smith spoke. He had little hope
that the distribution between merchants, manufiicturers, and land-
lords on the one hand, and the working masses on the other, would
be such as much to benefit the latter. Smith regarded this distribution
as depending in the first instance on relative bargaining strength.
And he did not bcheve it difficult ‘to foresee which of die two parties
must upon all ordinary occasions luve the advantage in die dispute’.
In an admirably succinct comment on the balance of cighteendi-
century economic power he added: ‘We have no acts of ParUament
against combining to lower die price of work; but many against
combining to raise it.’* So in the normal course of events die income
of the working masses would be pressed down and down. There was
a floor below which they would not fall. ‘A man must always live by
his work, and his wages must at least be sufficient to maintain him.
They must even upon most occasions be somewlut more; otherwise
it would be impossible for him to bring up a family, and the race of
such workmen could not last beyond die first generation.’ ‘

But this obviously was not much. On die contrary, aldiougli
Adam Smidi is rarely identified with the idea, this was one of the
beginnings of perhaps die most influential and certainly the most
despairing dictum in the history of social comment, the notion that
the income of the masses of die people— all who in one way or
another worked for a living and whether in industry or agriculture
—could not for very long rise very far above the minimum level
necessary for the survival of the race. It is the immortal iron law
which, as stiffened by Ricardo and refiishioned by Marx, became the
chief weapon in die eventual ideological assault on capitalism.

Smith was not categorical about die iron law— he was categorical
about almost nothing, and ever since economists have always been at

* Wealth of Nations, ch. VIII. (There are so many editions of this £unous work
that it seems idle to cite the pages of the particular edition one happens to use.)

•Ibid.

20

THE AFFLUENT SOCIETY

their best when they adhered to his example. Thus he conceded that
a scarcity of workers might keep wages above the subsistence level
for an indefinite time. Under conditions of rapid economic growth
wages would also rise. Growth was much more important than
wealth per se in its effect on wages. ‘It is not the actual greatness of
national wealth, but its continual increase, which occasions a rise in
the wages of labour. . . . England is certainly, in the present times, a
much richer country than any part of North America. The wages of
labour, however, are much higher in North America than in any
part of England.’*

Ill

Smith’s two great successors in the central tradition were David
Ricardo (1772-1823) and Tliomas Robert Malthus (1766-1834).
With Adam Smith they were the founding trinity of economics, at
least as tlic subject is known in the English-speaking countries. As the
man who first gave economics its modem structure— who looked at
the factors determining prices, rents, wages, and profits with a sense
of system tliat has served economists ever since— Ricardo has a
special claim to have bent the twig. Marxians and non-Marxians are
equally in his debt.

With Ricardo and Malthus the notion of massive privation and
great inequality became a basic premise. These conclusions were
never wholly unqualified. But the qualifications were only quali-
fications. It was to Ricardo and Malthus that Carlyle alluded when
he spoke in 1850 of the ‘Respectable Professors of the Dismal Science’
and gave to economics a name that it has never quite escaped because
it was never quite undeserved.

Of Malthus it is necessary to say only a word. Through the nine-
teenth century and to our own day he has been intimately and all but
exclusively identified with his Essay on Population. Though he had
odier and important things to say on economics which have been the
subject of a latter-day rediscovery, it is for his views on population
that he will be always known.

* Ibid. Smitli observes that this was written in 1773 before ‘the commencement
of the late disturbances’, meaning the American Revolution.

economics and the tradition of despair 21

The number of people who can live in the world is obviously
limited by the number that can be fed. Any increase in the supply of
food would bring, in Malthus’ view, an increase in the number of
people to consume it. Nothing but stark need limits the numbers
who are propagated and who endure. As a result, men will for ever
live on the verge of starvation. In the latter editions of the Essay
Malthus hedged somewhat; the increase in response to a surplus over
subsistence might be tempered by ‘moral restraint’ and also, some-
what more ambiguously, by ‘vice’. In other words, people might
indefinitely protect their standard of living at a level above sub-
sistence, and this would become aU the more likely once both
restraint and vice were abetted by eficctive contraceptive techniques.
But as also with Ricardo, Malthus’ qualifications were lost in the
sweep of his central proposition. This was the inevitability of mass
poverty. There was also the considerable fact that for a large part of
the world, the central proposition was vahd and the quahfications
were unimportant. So it was and so it remains in much of Asia.
Malthus, it may be noted, was professor of political economy in
Haileybury College, an institution maintained by the East India
Company for training its servants who would serve in India.

Since most men had always been poor, it is hardly surprising that
Malthus was on the whole unperturbed by his conclusions and that
he did not feel called upon to propose any remedy. (He confined
himself to urging the postponement of marriage and to recommend-
ing that there be incorporated into the marriage service a warning
that the husband and not the state would be responsible for the chil-
dren of the union so that if these were excessive die parents could
expect to be punished by want.) ‘The note of gloom and pessimism
which disting uis hed so much of the economic doctrine of the nine-
teendi century is in no small measure the legacy of Maldius.’^

IV

Both Adam Smith and Malthus had an instinct for national aggre-
gates— for the forces which acted to enrich the nation. While Malthus

* Alexander Gray, The Develoyment of Economic Doctrine (London, Longmans
Green, 1931), p. 163.

22

THE AFFLUENT SOCIETY

was concerned with sliowing how increased national wealdi might
be used up in the explosive impulse to procreate, neither was cen-
trally concerned with how difharent individuals and classes might
share in what the economy produced. This to David Ricardo was of
primary interest. What were the laws which governed the distri-
bution of product or income among the landlords, entrepreneurs,
and workers who had claim to it? ‘Political Economy you think is an
inquiry into tlic nature and causes of wealth— I think it should rather
be called an inquiry into the laws which determine the division of the
produce of industry amongst the classes who concur in its forma-
tion.’* These laws as Ricardo formulated them worked with fero-
cious inequality.

Like Malthus, Ricardo regarded population as a dependent vari-
able— it ‘regulates itself by the funds which are to employ it, and
therefore always increases or diminishes with the increase or diminu-
tion of capital’.^ Advancing wealth and productivity thus bring
more people; but dicy do not bring more land firom which to feed
these people. As a result those who own land are able to command an
ever greater return, given its quality, for what is an increasingly
scarce resource. Meanwhile, in Ricardo’s view, profits and wages
were in flat conflict for the rest of the product. An increase in profits,
other things being equal, meant a reduction in wages; an increase in
wages must always come out of profits. ‘Every rise of profits’ on the
other hand ‘is favourable to the accumulation of capital, and to the
further increase of population, and therefore would, in all probabiUty,
ultimately lead to an increase of rent.’* The effect of these compact
relationships will be clear. If the country is to have increasing capital
and product, profits must be good. But then as product expands the
population will increase. The food requirements of the population
will press on the available land supply and force up rents to the
advantage of the landowner. In other words, capitaHsts must prosper
if there is to be progress and landlords cannot help reaping its fruits.
The children of this inescapable misfortune are the people at large.

1 Letter to Malthus, October 9, 1820. In The Works and Correspondence of Datnd
Ricardo, ed. by Piero Sra& Cambridge University Press), vol. VIII, p. 278. These
volumes are hcnoefordi cited as Works and Correspondence.

• Ibid.. voL I, p. 78. • Ibid., p. 41 1.

ECONOMICS AND THE TRADITION OF DESPAIR

23

Ricardo summarized that prospect in, perhaps, the most quoted
passage in economic literature: ‘Labour, like all odicr things which
arc purchased and sold, and which may be increased or diminished in
quantity, has its natural and its market price. The natural price of
labour is that price which is necessary to enable the labourers, one
with another, to subsist and perpetuate their race, widiout either
increase or diminution.’^

This was the iron law of wages. As with Smith (and Malthus on
population) Ricardo followed the proposition with qualifications. In
an ‘improving’ society the market wage might be a^vc the natural
wage for an indefinite period and were Ricardo still alive he could
show with httle difficulty that the conditions necessary for die rule of
the iron law have been in abeyance ever since the nineteendi day of
April 1817, when On the Principles of Political Economy and Taxation
was publislicd. But although the truth rarely overtakes falsehood, it
has winged feet as compared with a qualification in pursuit of a bold
proposition. The iron law, in its uncompromised clarity, became part
of the intellectual capital of the world.

Moreover, as with Malthus, nothing could be done about it.
Ricardo brought his analysis to a close with the unbending observa-
tion that ‘These then are die laws by which wages are regulated, and
by which the happiness [a word to be duly noted] of far the greatest
part of every community is governed. Like all other contracts, wages
should be left to the fair and free competition of the market, and
should never be controlled by the interference of the legislature.’*
Nor may anyone be blamed. On a number of occasions Ricardo
complained that Malthus was unfiurly accusing him of being hostile
to landlords— ‘one would suppose firom his language tiiat I con-
sidered them enemies of the state’.® The landlords were merely the
passive and natural beneficiaries of their great good fortune. This
was die nature of things. Such was the Ricardian legacy.

There were many contradictions and ambiguities in Adam Smith.
There were also flaws in die Ricardian logic as it applied to die
Ricardian world. His treatment of capital and profits left much to be
desired. And he preoccupied himself with land at almost the point in

* Works and Correspondence, p. 93. * Ibid., p. 105.

• Ibid., vol. II, p. 117.

24

THE AFFLUENT SOCIETY

history wlieii, because of the opening of a new world, it had begiui
to lose its ancient preoccupying importance. Yet it is hard to think
that economists ever came much closer to interpreting the world in
which they lived than did Smith, Ricardo, and Malthus. None was
committed to preconceived doctrine. They had broken decisively
with the conventional wisdom of the traditionalist and mercantilist
society. They had no pubHc opinion to appease. The result was a
formidable interpretation of, and prescription for, the world as they
found it.

In a world tliat had for so long been so poor nothing was so im-
portant as to win an increase in wealth. The prescription— to free
men from the restraints and protection of feudal and mercantilist
society and put them on their own— was sound, for it was already
proving itself. Tliis was not a compassionate world. Many suflercd
and many were destroyed under the harsh and unpredictable rule of
competition and the market. But many had always perished for one
reason or another. Now some were flourishing. This was what
counted. One looked not at the peril and misfortune, for there had
always been peril and misfortune, but at the opportunity. In any case
nothing could be done about the inequaUty, for it was not rooted in
mutable social institutions but in biology. This was fortunate, for the
state was excluded from intervention by its prior commitment to
freedom of enterprise.

Remarkably httle that concerned contemporary economic society
was left unbuttoned. It is hardly surprising that a system, seemingly
so complete and practicable and so subject to test against the reaUties
of the world, made an indehble dent on men’s minds.

V

For thirty years following die death of Ricardo the development of
economics continued firmly in the tradition he had established.
Lesser men together with die conscientious and immeasurably learned
John Stuart Mill refined, developed, and organized the ideas. Their
thoughts remained centred on the Hberal economic society— that in
which economic life was r^;ulatcd by the market and not by the
state. On the Continent men did talk about socialism but in England

ECONOMICS AND THE TRADITION OF DESPAIR 25

and in die Anglo-Saxon tradition they took the market very nearly
for granted.

Then at mid-century the economic ideas in the descent from
Ricardo came to the great divide. The central tradition continued in
its course. It continued to provide the skeletal framework for econo-
mic ideas down to our own day. In so doing it gave them system and
continuity and went far to make economic life comprehensible. But
now, branching off to the left but with a common debt to Ricardo,
was the revolutionary tradition of Karl Marx. Henceforth, in shaping
attitudes toward economic life, it was both a massive competitor of
and a powerful influence on, die central tradidon.

The purpose of these chapters is not to trace the evolution of the
individual ideas. That is the task of other volumes and even more of
other authors. Rather it is to see what economics assumed in its
origins about the ordinary individual and his fate. As between the
early Ricardian world and that of Marx, diere was in this respect no
difference. For both the prospect, given the uninterrupted working
out of the underlying forces, combined peril with hopelessness. The
difierence was that Ricardo and his immediate followers expected die
system to survive and Marx did not. But for Ricardo the system
survived not because it served the ordinary man. Obviously it did
not. It survived only because there was no evident alternative and
certainly none that was better. Any effort to modify it made it less
efficient.

In time the case for the continuation of die liberal economic society
changed. Its superior efficiency was still argued. But by almost im-
perceptible degrees it came to be argued, or at least implied, that it
was also tolerable. It provided a reasonable prospect for the ordinary
man and something better for the individual of exceptional capa-
cities. This was widely taken as ushering in an age of optimism on
man’s material prospects. On closer examination, to which we now
turn, we shall see how mucli of the natal pessimism survive.

CHAPTER FOUR

#

The Uncertain Reassurance

As it was left by Malthas and Ricardo the economic prospect for the
ordinary individual was remarkably dull. His normal expectation
was to live on the edge of starvation. Anything better was abnormal.
Progress would enhance the wealth of those who, generally speaking,
were already rich but not of die masses. Nodiing could be done
about it. And these are more dian the casual conclusions of two men.
They have claim to be considered die propositions on which modem
economic thought was founded.

In the usual view, from the middle of the nineteenth century on
economists became more sanguine, even optimistic. England was the
centre of the influential discussion. She was in her great era of com-
mercial and industrial expansion. Real wages were rising. There was
a clear and apparently enduring margin over mere subsistence. In
Western Europe and America the Malthusian horror was also reced-
ing, although it was still possible to suppose that this was die result
of the fortuitous opening, all in a few decades, of the North Ameri-
can prairies and plains, die pampas and the veld, the New Zealand
pastures and the endless AustraUan outback. These could rescue the
world once but not twice. When population had caught up with
these new areas population would again press upon the food supply.
Only in the present century, as the relation between real income and
the rate of population increase has become increasingly unreliable,
has there ceased to be fear that the ghost of Malthus might return to
haunt western countries as it still roams the villages of Asia.

In the more specific realm of economic theory, the latter half of the
last century saw the rejection of the iron law. For a time the income

26

»

THE UNCEKTAIN KEASSVKANCE 27

of those who worked was thought to be limited by the amount of
working capital somehow dedicated to the employment of labour in
agriculture and industry. This was the famous wages fund which
John Stuart Mill fint espoused and then rejected. Doubts then began
to arise as to whether a single generalization on wages would suffice.
Education and special skiUs came to be regarded as having costs of
production that had to be paid for. Special abilities, it was concluded,
would, like land, command a rent. Finally, by the end of the century,
die worker’s return— bearing always in mind that by this is meant
the income of the masses of the people— was being related to the
value of his marginal product; i.e., he received what he added to the
value of his employer’s product. Were he paid less than the value of
his contribution it would be open to a competitor to offer him more,
for in a competitive world there would be other employers whose
product he could increase by more than liis wage. As a result— a
result that might be greatly aided by effective bargaining by a union
—wages would tend to be equated with the marginal productivity.
This might be high if workers were scarce and highly productive and
low if they were redundant and incompetent. But obviously diis
was a long distance from the iron law, and the break became com-
plete when it no longer seemed certain that well-being brought a
self-liquidating flood of cliildren.

With the dcvelopmait of the marginal productivity theory, the
efibrt to construct a general tlicory of remuneration came pretty
much to an end. Having satisfied themselves, as it were, that poverty
for those who toiled was not the natural order of things, economists
turned to other questions. Most recent work has concerned itself with
unions and with the bargaining power which the prescient Adam
Smith identified as die real problem.

Yet it would be a great mistake to suppose that economics in the
central tradition had escaped from its history. For one thing the
notion of an upper Umit on the incomes of the masses of the people
died very slowly: perhaps dicse incomes might not be pressed
remorselessly down to die floor but they would still be under a
ceiling. At Ae end of die last century Alfred Marshall (1842-1924),
whose Principles educated Ae older members of the present genera-
tion of economists, was still impelled to argue that if ’economic

28

THB AFFLUENT SOCIETY

conditions of the cotmtry remain stationary sufficiently long . . . both
machines and human beings would earn generally an amount that
corresponded fairly with their cost of rearing and traming, conven-
tional necessaries as well as those things which arc striedy necessary
being reckoned for’.^ In other words, wages would cover die cost of
producing die children, as these costs are conventionally reckoned,
and no more. As with Ricardo the tendency was still to a minimum.
In die United States in the early decades of the present century, the
leading figure in the central tradition and the most respected teacher
of his time was Professor Frank W. Taussig of Harvard. His sum-
mary of the prospect for the ordinary individual which he repub-
lished as late as 1936 was as follows: ‘The usual rate of wages for
ordinary labour in die United States was during the first decade of
the twentieth century not far firom $800 a year. This is much better
dian savagery . . . [but] ... If no more is in prospect, the institution
of private property stands not only on the defensive but in a position
that cannot long be defended. Yet something better is by no means
incompatible with the system.’* He was not yet prepared to assert
categorically that somctliing better was wholly compatible with the
system.

II

There remained down to our own time, in short, the lingering con-
viction that while economic life for the masses might not be intoler-
able it would still not be very good. In this degree Ricardo still
ruled. He ruled in another respect. For it was also believed that if
men were poor not much could be done about it. By skill, diligence,
and training the individual could raise his marginal product and
hence the wage he could claim. As the most obvious avenue of escape
for die individual firom poverty, this became a factor of great impor-
tance in shaping economic attitudes. There will be occasion to return
to it later. But if a worker’s wage was low it was because his marginal
product had remained low. To raise his wage without raising his

^ Alfred Manhall, Principles of Economics (8th cd.; London, Macmillan, 1927),
p. J77. The highly infrlicitous expression is exceptional.

* F. W. Taussig, Principles of Economia (3td eA; New York, Macmillan, I9j6),
p. 223. The fint edition was published in 1911.

THE UNCERTAIN REASSURANCE 29

marginal productivity would be to put his pay above his contribu-
tion. This would make it profitable for his employer to fire hitri
Thus the alternative to low wages was unemployment. Nor is this
an antique view. ‘Each worker receives the value of his marginal
product under competition. If a minimum wage is effective, it must
therefore have one of two effects: first, workers whose services are
worth less than the minimum wage are discharged (and thus forced
into unregulated fields of employment or into unemployment . . .)
or, second, the productivity of low-efficiency workers is increased.’*
The second likelihood was discarded. The legislation was thus shown
to be damaging to those for whom it was designed. Hiis analysis was
offered by an able and young scholar in 1946.

The marginal productivity theory, moreover, provided no re-
assurance on the other malign tmdency of the Ricardian system
which was for the rich to become very rich indeed. Capital like
labour was compensated at a rate corresponding to its marginal pro-
duct. However appropriate and just this arrangement of things miglit
be, it followed that if the capital were owned in large amounts by
few individuals it would be to these that its income would accrue. The
resulting inequality might be very great. Observation suggested
that this would be the case. In the halfcentury following the Civil
War in the United States, men accumulated fortunes of incredible
size. Between 1892 and 1899 Rockefeller’s penonal dividends from
Standard Oil amoimted to between $30,000,000 and $40,000,000. In
iSKX} Andrew Carnegie had an income fiom his steel companies of
$23,000,000.* These revenues were not subject to tax, and the dollar
then was worth rather more than now. In addition to oil and steel,
railroads, real estate, copper, banking, and odier pursuits returned
vast rewards. While some of it represented a return on capital, some
could readily be rdated to a strategic grip on ‘original and (not per-
haps entirely) indestructible powen of the soil’ and of the subsoil
from which, precisely, Ricardo expected vast wealth would be
derived.

There was imeasiness in the central tradition over this inequality.

* G. J. Stigler, 'Tlie Eooaoiiiia of Mininuun Wage Legislation’, Amerkan
Economk Review, vol. XXXVI, no. 3 (June 1946), p. 358.

* New Yoik Timet, Mardi 4, 1957.

30 THE AFFLUENT SOCIETY

The inheritance of wealth was a special source of discomfort. Perhaps
one could justify riches as the reward for the skill, diligence, fore-
sight, and cunning of the original creator. None of this justified its
highly fortuitous devolution on the individual who happened to be
die son. Monopoly was also regarded with grave misgivii^. This
rewarded not production but the ability to control production.
Moreover the rule of competition, a point to be emphasized in a
moment, was fundamental. Nothing else so completely and utterly
underwrote the logic of the system. Inequality resulting from mono-
poly might be the warning of fatal flaws in the system itself.

Those who might themselves be subject to equaUzation have
rarely been enthusiastic about equahty as a subject of social comment.
As a result there has anciently been a muted quality about debate on
the subject. Still the economists in the central tradition stated their
position with some clarity. There is, Marshall observed, ‘no moral
justification for extreme poverty side by side with great wealth. The
inequalities of wealth though less than they are often represented to
be, are a serious flaw in our economic organization’.^ In the United
States Taussig was more specific. ‘No stretch of psychological
analysis concerning the spur of ambition, the spice of constant emu-
lation, the staleness and flamess of uniformity, can prevail against the
universal conviction that the maximum of human happiness is not
promoted by great, gkrit^, permanent inequality.’*

Ill

The economy of the central tradition presupposed competition. This,
also, was the source of misgiving— a misgiving that was often
elaborately disguised but none die less acute.

The role of competition in the central tradition was fundamental
and it became increasingly precise. Numerous firms competed to
supply markets at prices whidi none controlled. The eflicient and the
progressive were rewarded with survival and growth. The inefficient
and unprogressive were penalized by extinction. The employees
obviously were involved in the rewards and penalties of their em-
ployers and had something of the same inducements to efficiency.

* Marshall, Principles of Economics, p. 714. * Taussig, op. cit., p. 207.

THE UNCERTAIN REASSURANCE

31

Competition was also the instrument of change. As the tastes of
the sovereign consumer altered, the demand for some products rose
and so did their prices. The demand and prices of products that were
less in vogue declined. Firms in the areas favoured by the new
demand expanded and others were attracted in. Where demand was
shrinking, firms would close down or lay off workers and contract
operations. To the extent that this mi^t be possible some would
follow the market into the areas of expanding demand. Capital as
well as labour and entrepreneurial talent was distributed according to
need by the same process.

In the closing decades of the last century and the early years of the
twentieth century economists became increasingly preoccupied with
the operation of the model of a competitive society. As it was de-
veloped and idealized, it was a thing of precision and symmetry,
almost of beauty. The hold which it came to exercise on men's minds
has often been remarked.^ There was no equally explicit appreciation
of the fact that it committed men to a remarkable measure of imccr-
tainty. The penalty for falling behind in the race for increased efficiency
was bankruptcy. This could also be the penalty of mere bad luck in the
case of the producer whose product was no longer wanted. And in
the case of the worker the component of luck, as opposed to the role
of penalty and reward for performance, was multiplied. The most
oaken worker could turn up in die employ of an inadequate entre-
preneur. The just misfortunes of the employer would then be visited
quite irrationally upon diis &ithful servant. He could lose his job and
his livelihood equally through his own shortcomings and those of
others. Needless to say, the competitive model had no place for
individuals who, as the result of age, infirmity, industrial injury or
congenital incompetence, had only a low or negligible marginal
productivity.

These misfortunes did not go entirely imperceivcd. It was ever
necessary to assert that they were ‘part of the system’. And it was

^ I have done so in Ameriam Capitalism: The Cmcept of ComUervailitig Power
(Boston: Houghton Mi£ 9 in, 195a), eq)ecully Chapter II. On the reasonable
assumption that die only individual less to be forgiven than the man who repeats
others is the man who repeats himself, my comment here on the competitive
model is brief.

32 THB AFFLUENT SOCIETY

also uudc clear by the prophets of the competitive model, not with-
out a certain ruthless logic, that to seek to mitigate the risks and un-
certainties of the system would be to undermine the system itself.
The race for increased efficiency required that the losers should lose.
If consumers were to rule, there must be rewards for those producers
who were in the path of current tastes and penalties for those who
were left behind. To seek to mitigate the penalties was to undermine
the incentives— to separate the stick from the carrot.

Abridgment of the rigours of competition might even be unjust
and immoral. ‘The traders or producers, who find that a rival is
offering goods at a lower price than will yield them a good profir,
arc angered at his intrusion, and complain of being wronged; even
though it may be true that those who buy the cheaper goods are in
greater need than themselves, and that the energy and resourceful-
ness of their rival is a social gain.’^ bideed there is a curious likehhood
that the competitive model, as it was adumbrated by the textbooks,
was intrinsically more insecure and dangerous than anything pro-
duced by competition in real life. In the real world competition was
abridged by custom, monopoly, trade unions, torpor, legislation,
.md even a degree of compassion. Thus the penalties for falling be-
liind in the race were exacted less relendcssly in practice than in
principle.

The basic impact of these ideas will be clear. The economic system
pictured in the central tradition was a thing of peril for those who
participated in it and so, pro tanto, was economic life at large. This
peril was a virtue, and the purer die peril the better the performance
of the system. Yet the intrinsic insecurity was disturbing and in two
respects. The vulnerability of the weakest members of the society
could not entirely be ignored. An economic system wliich of consti-
tutional necessity was so imfeeling, so intolerant of weakness, was
troubling. Even in the best of causes compassion is difficult to con-
trol. And equally disturbing was the unwillingness of ordinary men
—businessmen, farmers, workers, reformers— to live with diat peril.
At every turn they showed their inclination to press collectively or
with the aid of government for measures designed to make their life
more secure. Even if the insecurity of the competitive model was not
* Marshall, Principles of Economics, p. 8.

THB UNCERTAIN REASSURANCE

33

a damaging flaw, the efforts at self-protection that it induced almost
certainly were.

In addition, there was the gnawing doubt as to whether com-
petition, in fact, existed. As the nineteenth century wore along, botli
firms and fortunes grew. Control over economic life seemed to be
passing into fewer hands— a development whidi was heralded by
Marx as marking the system’s doom. As the notion of competition
became intellectually more precise the behaviour of the economy
became empirically more at odds with the competitive model Where
the latter called for many firms in a market there were in real life
often few. Where the competitive model called for a price that no
firm controlled, in real life some firms, at least, seemed to have quite
considerable discretionary power over price. And tmions were not
without power of their own.

In the twentieth century economists in die central tradition began
to accommodate die competitive model to these seeming facts of life.
Instead of pure competition dicrc was monopolistic competition or
imperfect competition. But who could be sure that a blending of
competition and monopoly would be benign? Would not such oddly
assorted parents produce a iiiis-sli.'ipen progeny?^

IV

There was a fuial source of disquiet in the central tradition. That was
die serious depression. Depression through the nineteenth and the
first dccadcs'of the twentieth century liad become ever more difficult
to ignore. Business suffered a sharp setback in the seventies following
the resumption of specie payment after the Civil War. There was a
period of comparative stagnation in the nineties and a brief interrup-
tion following the financial panic in 1907. There was a short but
severe depression following World War I. Then came the vast
disaster of the nineteen-diirties. What was the meaning of these
recurring misfortunes for the future of die system? Perhaps men
might not starve amidst Malthusian scarcity, but might it not still be
their &te to starve amidst an abundance they could not buy? Was it

* I have also dealt with this source of uneasiness, wdiich I regard as of prime
importance, in American Capitalism.

THE AFFLUENT SOCIETY

34

not a fair conclusion that by whatever means they were predestined
to poverty?

Nothing in the history of social ideas is more interesting than the
treatment of the so-called business cycle in the central tradition of
economic thought. Its study was isolated in a separate compartment.
(To some extent the quarantine still continues.) Prices, wages, rents
and interest, all of which were profoundly affected by depressions,
were studied on the assumption that depressions did not occur.
Normal conditions were assumed; normal meant stable prosperity.
In the separate study of the business cycle emphasis was placed on the
peculiar and non-recurring conditions which lay behind depres-
sion— the retirement of the greenbacks prior to 1873, the reac^ust-
ments following World War I, the breakdown of international trade
and capital movements and the collapse of the stock market in 1929.
But, paradoxically, there was an equal emphasis— sometimes in the
same work— on the rhythmic and normal character of the succession
of good times and bad. The etymology emphasiTed the rhythm— as
noted, the study was not of depressions but of the business cycle
which served to remind everyone that just as bad times followed
good, so good times would follow the bad. Even the word depres-
sion itself was the terminological product of an effort to soften the
connotation of deep trouble. In the last century the term crisis was
normally employed. With time, however, this acquired the conno-
tation of the misfortune it described. And Marx’s reference to the
‘capitalist crisis’ gave the word an ominous sound. The word panic,
which was a partial synonym a halfcentury ago, was no more reas-
suring. As a result the word depression was gradually brouglit into
use. This had a softer tone; it implied a yielding of the fabric of busi-
ness activity and not a crashing &U. During the Great Depression the
word depression acquired &om die event it described an even more
unsatisfactory connotation. Therefore the word recession was sub-
stituted to connote an unfearsome &11 in business activity. But this
term eventually acquired a foreboding quality and die recession ot
1953-4 was widely characterized as a rolling readjustment. Should
we have a really serious rolling readjustment this phrase would
become taboo.

To view the business cycle as a normal rhythm was to regard it as

THE UNCBKTAIN REASSURANCE

35

self-correcting. Hence nothing needed to be done about it. Remedies
are unnecessary if the patient is certain to recover and they are also
unwise. Writing in 1934, Joseph A. Schumpeter, then with Wesley C.
Mitcliell one of the world’s two most eminent authorities on die
business cycle, surveyed the e3q>erience of die preceding century and
concluded, ‘In all cases . . . recovery came ofitself. . . . But this is not
all: our analysis leads us to believe that recovery is sound only if it
does come ofitself. For any revival which is merely due to artificial
stimulus leaves part of the work of depressions undone and adds, to
an undigested remnant of maladjustment, new maladjustments of its
own.’*

Had depressions always remained mild, die notion of a normal
rhythm, which wisdom required be undisturbed, would have been
reassuring. But as depressions became more violent such a view was
the very reverse of reassuring. Workers lost their jobs. Farm prices
fell and some farmen lost their farms. Investors lost their savings and
some businessmen, more particularly the smaller ones, went bank-
rupt. And all this was insouciantly described as normal. The con-
clusion was inevitable: there must be somcdiing very wrong with a
system in which such faults were normal. Especially in the early
thirties the ideas in the central tradition acted powerfully to breed
such doubts. And those who were immune to such imeasiness had
another reason for disquiet. Although it was unwise to do anything
about depressions, ignorance and popular passion might easily force
some action. This could only serve to make things worse. In face of
a really bad depression, the notion of a normal self-correcting cycle
was calculated to provide uneasiness tailored for every temperament.

There is little need to stress the consequences. To the lingering
fear that poverty might be normal, the increasing conviction that
inequality was inevitable and the sense of individual insecurity wliich
was inherent in the competitive model, the orthodox view of the
business cycle added a mucli more general sense of disquiet. This was
the insecurity of a householder who is told tliat in the normal and

*J. A. Schumpeter, Essays, ed. by Richard V. demence (Cambridge, Mass.,
Addison-Wesley, 1951), p. 117. This essay was origiiully published in 1934 in
The Eeonomia of the Recovery Program (New York, Whitdescy House, McGraw-
Hill). The italics are in the original.

THB AFFLUENT SOCIETY

36

regular course of events he must expect his house to catch £re and liis
property to be partially or wholly destroyed. The fire cannot be pre-
vented or arrested for it has its work to do; to call for a fire depart-
ment is to invite an attempt to drown the flames by drenching them
with petrol.

Su^ was the legacy of ideas in the great central tradition of eco-
nomic thought. Behind the fi^de of hope and optimism there re-
mained the haunting fear of poverty, inequality, and insecurity.
Partly latent, partly in the suppressed backgromid of conviction,
these doubts could easily be aroused by such an occurrence as the
Great Depression.

But the reader will surely ask if there was not a more confident
stream of ideas— one more completely purged of all traces of the
Ricardian gloom. The question will occur especially to Americans:
surely in the American tradition there must have been a more con-
sistently optimistic current. Here there must have been some who
rejected doubt— who reflected an indigenous and abounding confi-
dence. Perhaps among those who neither read nor wrote there was
such confidence. But those who gave voice to the American ideas
were far firom confident.

CHAPTER PIVE

The American Mood

Only witliiii very narrow limits can one speak of a separate Ameri-
can tradition in economics. Ideas do not respect national frontiers,
and this is especially so where language and other traditions arc in
common. The precepts of the central tradition were accepted equally
by Englishmen and Americans. It was from Smith, Ricardo, Mill,
and Marshall that American economic ideas were derived. The ideas
were written by Americans into the textbooks and enlarged or
amended as to detail. But in the last century not much was added by
American theorists. Just as the ideas were common to both countries
so were die worries, uncertainties, and doubts which the ideas
engendered.

This is not to say there were no distinctively American figures but,
as compared witli the majestic audiority of the central tradition, their
influence was comparatively small. There would be a measure of
agreement on who were the three that were most heard. They were
not the total of die American voice but they were also far more than
a mere sample. Of the three, two did nothing to offiet the presump-
tion of privation and the sense of foreboding which lingered in the
central tradition. On the contrary they did a good deal to accen-
tuate it.

The exception was Henry Charles Carey (1793-1879) who did
voice the buoyant optimism which one is obliged to diink appro-
priate to die new republic. Ricardo, he observed, had never seen
from his window the progress of a new settlement; had he done so
he would have had a different view of the prospects for mankind.
Drawing on such observation he argued diat, widi the passage of

37

THE AFFLUENT SOCIETY

38

hrtip, men were not forced as Ricardo claimed to poorer and poorer
land with ever lower return to their labour and, for any land that was
better than the wont, ever higher rents to the landlords. On the con-
trary they first cultivated the diin but unencumbered soil on top of
the hills. Then at a later period diey tackled the duck vegetation in
the valleys; having cleared away the trees they proceeded to work
this richer alluvial soil. The returns to their toil were not less but
more. In his first book in 1835 which, like those of his English con-
temporaries, centred on the problem of wages and thus as ever on the
mass prospect for poverty or well-being, he argued that real wages
during the previous forty years had shown a tendency to rise. This,
too, was in contrast with Ricardian expectations.

But even Carey was not an unqualified optimist. He more than
half-agreed with Malthus on the procreative power of mankind and
in his earlier books he hazarded die guess that the time might come
when ‘ there will not even be standing room’.^ And the influence of
Carey, whether as an optimist or pessimist, was not great. Of this he
himself was aware. He complained bitterly of the small attention
that was paid to liis ideas in his own country. In Europe he felt that
he was discussed more seriously, and tliis may well have been so.*
Litde or nodiing of Carey passed into die tradition of American
economic thought. His books mouldered and died. In the last fifty
years he has been mentioned only as a curiosity— an early American
economist who had the fortitude to disagree with Ricardo on rent
and with Adam Smith on die virtues of free trade.

II

The two odier distinctively American figures had more enduring
influence. These were Henry George and Thorstein Veblen. But so
far from manifestuig the exuberant attitudes of the frontier, both
were prophets of a gloom that was, in some respects, more profound
tiian tliat of Ricardo. Henry George (1839-97) was like Marx the
foimdcr of a faith, and the faidiful still assemble to do honoiu: to their

* Quoted by Gray, The Development of Economic Doctrine, p. 236.

* See Joseph Dorfman, The Economic Mind in American Civilisathti, t 6 o 6 -i 86 s
(New York, Viking, 1946), p. 804.

4

THE AMERICAN MOOD

39

prophet. Like Adam Smith he made clear his view of the social
prospect in the title of his remarkable hook: Progress and Poverty. An
Inquiry into the Cause of Industrial Depressions and of Increase of Want
with Increase of Wealth. In the opening chapter he posed his basic
questions: Why in a time of goieral economic advance— he was
writing in die dqpression years following 1873— should so mucli
labour ‘be condemned to involuntary idleness*, shorild there be so
much ‘pecuniary distress among businessmen’, and so much ‘want,
suffering and anxiety among the working classes Why, to press
things furtlier, should there be so little gain to the poorest classes from
increased productive power. ‘Nay, more,* why should its effect be
‘still further to suppress the condition of the lowest classes*.*

The reason for this pervene aspect of progress was again part of the
almost infinite legacy of Ricardo. Labour and capital increased in
productivity; the land supply remained constant in quality and
amount. Rents, as a result, increased more than proportionately and
made the landlords the undeserving beneficiaries of advance. The
anticipation of rent increases and attendant speculation in land values
was also the cause of depression. (It is worth recalling that the nine-
teenth centvuy was marked by recurrent outbreaks of real-estate
speculation, especially in the West, and that Henry George spent
much of his life in California. Economic ideas, as ever, have dieir
nexus with their environment.) So long as there was private property
in land, poverty and depressions were the prospect. Progress would
make them wone.

In one respect Henry George was radically more optimistic than
Ricardo. On his title page were the further words The Remedy; this
phrase had no place in the Ricardian lexicon. If land were national-
ized— more precisely if a tax were imposed equal to the annual use
value of real property ex its improvements, so that it would now
have no net earnings and hence no capital value— progress would be
orderly and its fruits would be equitably shared. But this, obviously,
was a very drastic prescription. Were the remedy not appUed, and
this was a reasonable prospect given the predictable reaction of

* Bbnry George, Progress and Poverty (Hftieth Anniversary Ed.; New York,
Robert Shalkenbach Foimdation, 1933), p. 5.

* lUd., p. 9.

THE AFFLUENT SOCIETY

40

property owners to the proposal, then the consequence would
be r nt i tinning poverty combined with increasing inequality and
inrrrasing insecurity. If this was the American dream, it had little to
commend it as compared with the meagre classical prospect. And
in fict the mood of Henry George’s followers was often one of
misanthropic or frustrated radicalism.

Ill

In the tradition of American popular radicalism there were other
influential figures besides Henry George— Henry Demarest Lloyd
and Edward Bellamy come especially to mind as important figures
of the latter decades of the last century. Their conclusions, however,
were broadly similar: great inequality and great poverty were inevit-
able in the absence of great reform. And unlike Henry George their
words mostly died widi tliem. There remains, however, the man
whom many regard as tlie uniquely American economist, Tliorstcin
Vcblen (1857-1929).^

For the eager search for re.nssurancc that followed die Ricardian
gloom, Veblcn substituted a grandiloquent iconoclasm. Ricardo had
forecast a disi^recable fate for most of mankind. His foUow'en hoped
against hope that it might not be. Vcblen took a position above the
debate. The fate of man was something with which, at least for pur-
poses of posture, he cliose not to identify himself. But he also made
clear his view that those who talked of progress were mostly idiots
or firauds.

To this end he made specific many of the misfortunes that lurked
in the background of the central tradition. Poverty, or more accur-
ately bodi the moral and material debasement of man, was part of
the system and would become worse widi progress. There is an

* A case might be made for the influence of three other men who were generally
outside the central tradition; namely, Simon N. Patten (1852-1922), John R.
Commons (1862-1945), and Wesley C. Mitchell (1874-1948). However, Patten,
a singularly interesting and original figure, has joined Carey in the neglect reserved
for American heretics. Commons and MitdicU, as a matter of piindiple or method,
largely avoided any overall theoretical formulation of man’s prospects and hence
could not be said to have contributed to the attitudes with ^^lich we ate here
concerned.

I

THE AMERICAN MOOD 4I

inescapable conflict between industry and business— between the
‘excessive prevalence and efficiency of the machine industry* and its
‘deplorable* tendency to overproduce and thus to threaten the basic
goal of business which is to make money.^ In this conflict business
always wins. Monopolistic restrictions are imposed where, on purely
technical grounds, there could be abundance. This channels income
to the owners. The public pays with relative impoverishment.

The economic costs of progress arc, however, even less severe than
its cultural consequences. Machine industry docs not necessarily call
for less intelligence on the part of the workers. But it docs require a
peculiarly narrow and mechanical process of thought and it dis-
courages all other. It also undermines family and church and (here
the unions play a key role) die ancient foundations of law and order.
The massing together of the workers is a great inducement to ‘ socialist
iconodasm* which is the threshold to anarchy.

Serious depressions arc not accidental misfortunes. They arc
inherent in the conflict between industry and business and hence arc
organic aspects of the system. They occur ‘in the regular course of
business*.®

Finally, in liis immortal The Theory of the Leisure Class, ^ Veblen
dramatized, as no one before or since, the spectacle of inequality. The
rich and successful were divorced from any serious economic func-
tion and denied the dignity of even a serious or indignant attack.
They became, instead, a subject for detached, bemused and per-
haps subtly contemptuous observation. One observes the struggle
between hens for social pre-eminence in the chicken yard as an inter-
esting phenomenon but in so doing one does not do much to under-
write ffic social values of the birds. So with Veblen on the rich.

But equally with Ricardo, wealth and poverty were made inher-
ent. And so, moreover, were their least ingratiating aspects. The
ostentation, waste, idleness, and immorahty of the rich were all pur-
poseful: they were the advertisements of success in die pecuniary

^ Thorstein Veblen, The Theory of Business Enterprise (1932 ed.; New York
Scribner), p. 234.

® Aid., p. 183. The conclusions sketched above are principally developed in
The Theory of Business Enterprise,

® Published in 1899. This is available in the Modem Library.

C*

42

THE AFFLUENT SOCIETY

culture. Work, by contrast, vras merely a caste mark of inferiority.
‘During the predatory culture labour comes to be associated in men’s
habits of thought Avith weakness and subjection to a master. It is,
therefore, a mark of inferiority, and, therefore, comes to be accounted
unworthy of man in his best estate.’^ In the central tradition the
worker was accorded the glory of honest toil. Veblen denied him
even that.

Nor was there any hope for change. These things were part of the
pecuniary culture. Where Marx looked forward hopefully to revo-
lutionary reconstruction, Veblen did not. In his latter years he com-
forted himself only with the thought that the evolving economic
society was destroying not only itself, but all civilization as well. Such
was the view of the greatest voice firom the frontier.

There will always be debate as to how influential Veblen was. He
is the indubitably indigenous figure in American economic thought.
This has always commended him to those who— failing to see the
enormous authority of the orthodox-classical tradition— have sup-
posed that the dominating influence in American thought must be
an American.* This must still be true even though, as in die case of
Veblen, no one could worse fit the cultural stereotype of the opti-
mistie, extrovert American. In fact Veblen’s strictly economic
conclusions were not widely read or taught. They never entered the
textbooks in competition with the ideas of the central tradition. Yet
he was no Carey. He influenced a generation of sdiolars, writers, and
teachers. These, in turn, broi^ht something of his iconoclasm to the
ideas of the time. Teachers influenced by Veblen taught the doctrines
of the central tradition but they brought to it a disbelief, even a con-
tempt, for the notion that economic progress could much benefit the
masses or, indeed, that there was su^ a thing. Veblen thus precipi-
tated the doubts and pessimism which lurked in the coitral tradition,
in American social thought before the Great Depression there was a
strong freling, manifested for example in such liberal journals as
The Nation and The New Republic, diat the hard-headed intellectual

* The Theory of Ae Leisure Class, p. 36.

* This is a criticism which, I think, can fiuily be made of Professot Conunager.
Cf. his discussion of Veblen in The American Mind (New Haven, Yale University
Press, 1950), pp. 227^46.

!

THE AMERICAN MOOD 43

was never beguiled by notions of reform or advance under capital-
ism. These when offered were either a fa9ade, a trap, or an illusion
which would quickly bring disenchantment. These attitudes faded
widi the New Deal, but not until the Roosevelt reforms had been
similarly and repeatedly discussed and dismissed. These attitudes were
in no small measure the legacy of Veblen.

IV

Such was die distinctively American contribution. However, we
must take note of the impact of anodier set of social ideas— ideas
which though not American in origin came almost uniquely to root
in the American soil. Toward the close of the last century and in the
early years of this they deeply influenced attitudes on the fate of the
ordinary man. These were the doctrines of the Social Darwinists.

Ricardo and Malthus did not conceal from anyone that theirs was
a world of struggle. In that struggle some, and perhaps many, suc-
cumbed and there was no hope in public measures to ameliorate the
lot of those who were to Speaking of the poor laws, then sup-

ported by a fund subscribed by each parish for the support of the
indigent, Ricardo concluded that no scheme for their amendment
‘merits the least attention, which has not thdr abolition for its ulti-
mate object’, adding that ‘the principle of gravitation is not more
certain than the tendency of such laws to change wealth and power
into misery and weakness’.*

However, Ricardo’s case for leaving everything to die market—
for not allowing compassion to interfere with economic process
—was essentially functional. Idleness not being subsidized and sub-
stance not being wasted, more was produced and die general well-
being would flhus be raised. Stn^gle and tmisfortune were not
themselves to be welcomed.

The position of the Social Darwinists was different. Economic
society was an arena in which men met to compete. The terms of the
struggle were established by the market. Those who won were
rewarded with survival and, if they survived brilliandy, with riches.
Those who lost went to the lions. This competition not only sdected

^ Frindpks MUteal Eemmy, pp. 107-8.

44

THB AFFLUENT SOCIETY

the Strong but developed their faculties and insured their perpetua-
tion. And in eliminating the weak it ensured that they would not
reproduce their kind. Thus the struggle was socially benign and, to
a point at least, the more merciless the more benign its efiects, for the
more weaklings it combed out.

The birthplace of these ideas was nineteenth-century England, and
their principal source and protagonist was Herbert Spencer (1820-
1903). It was Spencer and not Charles Darwin who gave the world
the phrase ‘the survival of the fittest', and it was first applied not to
the lower animals but to mankind. Spencer believed that acquired as
well as inherited traits were genetically transmitted.

Spencer was a decidedly uncompromising exponent of a very un-
compromising creed. He opposed state ownership of the post office
and the mint. He was opposed to public education, for it interfered
with parental choice between different schools and, indeed, with the
choice between wisdom and ignorance for their children. Public aid
to the needy and even public sanitation tended to perpetuate the
more vulnerable memben of the race.

Partly by weeding out those of lowest development, and partly by sub-
jecting those who remain to the never ceasing discipline of experience,
nature secures the growth of a race who shall both understand the condi-
tions of existence and be able to act up to them. It is impossible in any
degree to suspend this discipline by stepping in between ignorance and its
consequences, without, to a corresponding degree, suspending the progress.
If to be ignorant were as safe as to be wise, no one would become wise.^

Spencer was restrained from a condemnation of all private charity
only by the disturbing thought that this would abri^e the liberty of
the giver as surely as it would winnow out the weaklings of the race.
Misery and misfortune are not misery and misfisrtune alone but the
rungs of a ladder up which man makes his ascent. To seek to mitigate
misery was to put in abeyance the fundamental arrangements by
which nature insured progress. ‘What can be a more extreme
absurdity than that of proposing to improve social life by breaking
the fundamental law of social life.’ *

^ Social Statics (New York, D. Appleton, 1865), p. 413.

* Principles of Ethics, vol. 11 (New York, D. Appleton tc Co., 1897), p. 260.

THE AMERICAN MOOD

45

Although Spencer was an Englishman, Social Darwinism had
much of its greatest success in the United States. Here, in William
Graham Siunncr (1840-1910) of Yale, it found its nujor prophet.
Here too it found a host of minor ones. Spencer’s own books were
widely read, or at least widely discussed, in the closing decades of die
nineteenth century and the opening years of the present one. When
Spencer visited the United States in 1882, he was accorded a welcome
by the faithful befitting a messiah. In 1904, when the Supreme Court
struck down a New York State law limiting the hours of labour of
bakers to ten a day. Justice Holmes observed that ‘The Fourteenth
Amendment does not enact Mr. Herbert Spencer’s Social Statics.’^
It was a dissenting opinion.

There were a number of reasons for this popularity in the new
republic. By the time of Spencer, England was already moving away
from the unhampered rule of the market. Unions, factory inspection,
the regulation of the hours of women and children had gained
acceptance. In the United States die race was still being more ruth-
lessly improved.

And there were many who wished to see the improvement con-
tinue with all it implied for those who had been selected. ‘The pecu-
liar conditions of American society’, Henry Ward Beecher told
Spencer as early as 1866, ‘has made your writings far more quicken-
ing here than in Europe.’* In &ct, ideas were never more mar-
vellously in the service of circumstance.

The rise of Social Darwinism in the United States coincided with
die rise of the great fortunes. It was a time not only of heroic in-
equality but of incredible ostoitadon. Great limestone mansions were
rising in New York. Even mote stately pleasure domes were being
built in Newport. Mrs. William K. Vanderbilt gave her $250,000
ball in 1883. That of Bradley Martin in 1897 was rather more lavish.
For this the ballroom of die old Waldorf-Astoria was transformed
into a replica of Versailles. One guest appeared in a suit of gold-inlaid
armour valued at an estimated $10,000. A little earlier at Dcl-
monico’s— where Spencer had been entertained— guests were given

* Lodiner v. New York, 1904.

* Quoted by Richard Hofitadter. Scant Dnmhriatt in American Thought (fioston.
Deacon Press, 1955), p. 31.

THE AFFLUENT SOCIETY

46

cigarettes wrapped in himdred-doUar bills which they lighted with a
legitimate sense of affluence.

It was also a time of widespread poverty and degradation. The
distant workers who supported this wealth lived in noisome slums.
There were numerous beggars near at hand. Nor could it always be
said that the wealth was being acquired without cost to others. The
techniques were sometinics very rude. But none of this need lie on
anyone’s conscience. Natural selection was at work. The rich could
regard themselves as the product of its handiwork— as Chauncey
Depew was pleased to remind those who attended one of die great
diimers of the successful in New York. So, an important point, would
be their sons for the superior qualities were genetically transmitted.
This legitimized inherited wealth, for it blessed only the biologically
superior. The problem of poverty, meanwhile, was being solved by
the only means by which it could be solved. The unfit were being
weeded out. Public and even private succour, which if compelled by
compassion could be inconveniendy expensive, was banned not by
callousness but by a perceptive adherence to the laws of nature. ‘The
law of the survival of the fittest was not made by man. We can only
by interfering with it produce the survival of the unfittest.’^ How
much better to resist taxation and diarity and, incidentally, keep
one’s money. To this day the man who refuses a beggar and righ-
teously observes, T’m told it’s the worst thing you can do’, is still
finding useful the inspired formula of Spencer and Sumner.

Nor need one reflect, imcomfortably, on the methods by which
growth had beoi achieved and wealth acquired. As John D. Rocke-
feller explained to a fortunate Sunday-school class: ‘The growth of
a large business is merely the survival of the fittest. . . . The American
Beauty rose can be produced in the splendour and fragrance which
bring cheer to its beholder only by sacrificing the early buds which
grow up around it.’ As with the rose, so with the Standard Oil
Company. ‘This is not an evil tendency in business. It is merely the
worl^g-out of a law of nature and a law of God.’* This aligned God
and the American Beauty rose with railroad rebates, exclusive con-

1 William Graham Sumner, Essays in Political and Social Science (New York'
Henry Holt, 1885), p. 85.

^Hotfudter, Social Darwinism in American Thought, p. 45.

THE AMERICAN MOOD

47

trol of pipelines, systematic price discrimination, and some other
remarkably aggressive business practices.

V

In 1956 the retiring president of the National Association of Manu-
&cturers, Mr. Cola G. Parker, called solemnly in the name of
Herbert Spencer on the working men of die coimtry to reject the
slavery of their unions and on businessmen to renounce the paternal-
ism of Washington. Concerning the latter he said in a dynamic sen-
tence: ‘Before we can build soUdly into the glorious future this is
another imsound part of our structure which we'll have to get rid
of, even though it causes severe pain to us businessmen to forgo die
federal crutches we have been leaning on.* Neither workers nor
businessmen took any concrete steps in response to his plea.

However, the names of Spencer and Sumner had long before
ceased to evoke response. Bodi democracy and die modem corpora-
tion had dealt crippling blows. The masses of the people had shown
a marked unwillingness to vote for the self-denying policies which
would contribute to their own combing out. Individuals were always
coming forward with ideas for abridging the struggle and winning
elections on this platform. If Social Darwinism was to work, there all
too obviously had to be some curtailment of popular government.
To enforce acquiescence in misfortune there also needed to be a
constabulary whose loyalty was properly insured by social security
and seniority.

The corporation dealt a different kind of blow. The compedtive
struggle, as a device for sq>arating die strong from the weak, at least
had dements of plausibility in ^e world of the individual entre-
preneur. And conceivably ^e rugged traits which permit of survival
in this contest are passed on to strengthen the generadons that follow.
It is not so easy to apply this reasoning to the case of General Electric
or General Motors. These sliow marked indicadons of immortality.
And it is not dear how sdecdon works through reproduedon to
bring a new generadon of youi^ and vigorous companies r^eedng
the strong bloodlines of their corporate parents. Peihaps it could be
argued that natural selection operates to bring to die top those ivbo

48

THE AFFLUENT SOCIETY

are most efiective in the struggle for promotion— that it rewards with
survival those who are most sidled in the tough, comploc,
and ingenious talents that such advance so often requires. If so,
then Social Darwinism would work just as selectively in govern-
ment where the bureaucratic struggle is reputedly severe. This could
not be.

Yet Social Darwinism bore importantly on the attitudes whicli
Americans brought into the age of affluence. This was the country
where wealth was increasing most rapidly. It was the one where the
reassurance of the central tradition might seem to be most plausible.
Here, if anywhere, die ordinary man had a chance. Perhaps he did,
but he also had to face the fact diat all economic life was a mortal
struggle. He miglit win but he ako might lose, and for him to accept
die full consequences of loss— himger, privation, and death— was a
social necessity. Poverty and insecurity thus became inherent in the
economic life of even the most favoured country. So, of course, did
inequality, and this was firmly sanctified by the fact that those who
enjoyed it were better. If observation suggested that economic life
might be less severe in the United States, Social Darwinism empha-
sized the contrary.

It had another lasting efiect. American thought has always been
prone to attribute a mystique to the market. More than mere
efficiency is involved in uninhibited operation of supply and demand.
Other values are at stake. The Social Darwinists identified the vigour
of the race with the market. This notion ivithered and disappeared.
But it was easy for others to identify yet other and equally extraneous
values with the market and to warn, accordingly, of the pervasive
consequences of anything which, in the name of wdfore or com-
passion, might interfere with the firee play of market forces. Bio-
logical progress is no longer threatened by measures which lessen the
perils of economic life for the individual. But liberty still is. So, in one
fairly substantial view, is Christianity and the chance for eternal sal-
vation. To a considerable degree it was Social Darwinism which led
the way in so broadening the claim for the market. In so doing it
narrowed the scope for social measures designed to rescue the indi-
vidual fi:om the privation or to protect him from the hazards of
economic life.

THE AMERICAN MOOD

49

One would not care to claim tliat tliis chapter exhausts the influ-
ences which liave home distinctively on American economic atti-
tudes. As noted, die frontier and the West had tlicir own expansive
mood. So, on the whole, did a good deal of American political debate
in die latter part of the last century and the early decades of the
present one. Without question much of this expressed the conviction
that any American— at a minimum any properly energetic American
of Anglo-Saxon and Protestant antecedents— could by his own efforts
be comfortably opulent. But the ideas which were tauglit and read,
and by which die properly quahfied were guided, were far from
sanguine. The most influential critics were either misandiropic or
committed to the need for massive reform. The establislied right
pictured and praised a struggle diat improved on diat of Ricardo
only in being more heroic and spectacular and in rejoicing over die
immolation of the unfortunate.

CHAPTER SIX

«

The Marxian Pall

In the descent from Ricardo tlic Social Darwinists were an eddy to
the right. Marx was a massive eruption to the left. But the roots of
Marx were deep in the central tradition. There were socialists before
Marx, but there have been a great many more since. One reason is
diat Marx built socialism on Ricardo’s orderly arrangement of eco-
nomic ideas and, in particular, on his bold conception of the problem
of income distribution. At least partly as a result, his work carried an
authority and conviction that was incomparably greater than any of
Iris sociahst predecessors’.

For seventy-five years following liis dcadi, Ricardo’s admirers
were concerned to defend him from the charge, levelled among
others by Rtiskin, diat he was a cold-blooded stockbroker who took
a totally detached view of the misery he foresaw for all eternity. The
charge may have been unfair, but no one has suggested that Ricardo
was a man of passion. Karl Marx (1S18-83) was a man of passion and
of Jovian wrath, and this is a matter of first importance. For the
Ricardian conclusions — the inevitable impoverishment of the masses,
the progressive enridunent of those who own the natural means of
production, the inevitable conflict between w^es and profits and the
priority of the latter for progress—could become, in the hands of an
angry man, a call to revolution. As noted, Marx’s conception of
capitahsm was no more gloomy than that of Ricardo or of Malthus.
But unlike Ricardo and Malthus, Marx’s mission was to identify
fault, place blame, urge change and, above all, to enhst disciplined
belief. In the latter his success exceeded diat of any mao since
Mohammed.

50

THE MARXIAN PALL

SI

II

The iron law of wages continued in Marx but in a modified form.
The worker is kept on the margin of destitution less because he
breeds up to this point than because of his utter weakness in d ^tling
with the capitalist employer and because the system won’t work if
he is well paid. On occasion he may get more than the bare mini-
mum, but it is for the same reason that the dairyman feeds his cows
more than the maintenance ration— tliey give liim more milk. The
bargaining position of the worker vis-a-vis the employer is the
same as that of the cows vis-a-vis the dairyman.

This is partly so because the labour force is a reservoir into which,
with the passage of time, independent craftsmen and &rmers are also
forced. Helplessness is assured by the industrial reserve anny — by the
rising and falling but enduring margin of unemployment which is
part of the system. Any worker at any time can be flushed into this
reserve which ensures that he will be co-operative and will accept the
wage that is offered him.

The advance of the arts and tlie accumulation of capital bring no
benefit to tire average man. On the contrary, in some of Marx’s
characteristic prose, they ‘. . . mutilate the labourer into a fragment
of a man, degrade him to the level of appendage of a machine,
destroy every remnant of charm in Ins work and turn it into hated
toil . . . drag his wife and child beneath the Juggernaut . . . [they
bring] misery, agony of toil, slavery, ignorance, mental degrada-
tion. . .

Resorting to a device which many others have found useful, Marx
dug up a candid opponent to help him make his case. A prominent
conservative, Destutt de Tracy, had observed: ‘In poor countries the
people are comfortable, in rich nations they are generally poor.’*

Further, and in its ultimate influence perhaps the most important
of all, the system had an inherent tendency to devastating depression.
Sismondi, the great French historian, philosopher and economist,
had published at the beginning of the century a book which reflected
muic^ of the hopeful attitude of Adam Smith. Then, sixteen years

* Capital (London, William Glieslwr, 1918)1 pp* <S6o-i. * Und^ p. 664.

THE AFFLUENT SOCIETY

52

later and after extensive travels over Western Europe, he returned to
the subject impressed by the importance of industrial crises and
persua^d that they would get worse. The trouble was that the pur-
chasing power of Ac workers did not keep abreast of what Aey pro-
duced. As a result, goods accumulated for which Acre were no
buyers. A crisis became inevitable. Marx’s view of depressions, which
he was still working out when he Aed, was roughly similar and so,
in recent times, has been that of almost everyone.

However, Marx stressed oAer causes too. As capital accumulated,
the rate of return would fall. This would weaken incentives and lead
to peiioA of torpor and stagnation. Also in boom times Ae indus-
trial reserve army— Ac unemployed— would be reduced, and Ae
resulting competitiou for labour would force up wage rates, and
hence costs of production, and this would bring Ae boom to an end.^
Nothing so well suggests Marx’s intransigent pessimism on Ae out-
look for Ae worker under capitalism as diis. A temporary betterment
of his position is Ae cause of a prompt worsening of it. Depressions
are caused boA by Ae poverty of Ae workers (and Aeir insufficient
purchasing power) and equally by temporary improvements in Aeir
well-being.

Since Ae govenmicnt, for Marx, was Ac handmaiden of Ae
bourgeoisie, Aere was small HkcHhood Aat it would be impelled to
succour Ae unemployed by making jobs for Aem. But were it to do
so Ae effect would be only to reduce Ae industrial reserve army,
raise wage costs, and cause a depression. To correct Ae deficiency of
purchasing power— Ae deficiency Aat kept workers firom buying
Ae products of Aeir labour— by public measures to put more pur-
chasing power in Ae hanA of Ae people, as by spending for public
works, would be futile for Ae same reasons. Also Aere are deeper
disorders in Ae process of ‘production and reproduction’ which such
superficialities leave untouched and which render Aem worthless.*

^ Marx’s explanation of the business cycle is scattered through his work and is in
some respects, as Professor Schmnpeter has observed, rather casual This summary
owes much to Mrs. Joan Robinson’s indispensable book. An Essay on Marxian
Economics (London, Macmillan, 1952).

* I should, perhaps, remind the reader that I am here concerned with a charac*
tcrization of the Marxian position and of its impact on attitudes and not with a
critique. Marxian critiques are still very, very long.

THE MARXIAN PALL

53

This point is one of considerable importance to Marx and even more
to his followers. Were it possible to prevent depressions by compen-
sating for the deficient purchasing power of the worker with (say)
public spending, dien capitalism might be workable. Instead of revo-
lution there would be a budget deficit. Every acute Marxian has seen
the danger and denied the possibility of such an easy escape. In one
of those developments which make economics such an engaging
study in odd bedfellows, the Marxists have been joined in this con-
tention by the most stalwart conservatives.*

With the longer-run Marxian prospect everyone is familiar.
Capitalist concoitration proceeds; productive plant and resources
come to be owned by ever fewer people of ever greater wealth. The
Marxian capitalist has infinite shrewdness or cunning on everything
except matters pertaining to his own ultimate survival. On these he is
not subject to education. He continues wilfully and reliably down the
path to his own destruction. The worker, by contrast, whom he
degrades and beats to a hopeless pulp, is gifted with quick perception
and the capacity to leam. He is reinforced by *. . . fresh elements of
oilightenment and progress ’ from the sections of die ruling class who
are extruded by the process of capitalist concentration.* In the end die
centralization of production produces hopeless weakness in fact of the
masses of the workers who by now have become a disciplined indus-
trial army. Then the knell sounds and the expropriators are expro-
priated. At the next stage Marx joins the optimists. The path is now
open to a laissez-foire more complete by far than that of Ricardo.
For gov ernmen t was occasioned by the needs of capitalism and the
acquisitive mentality which capitalism produced. With no further
need to police the masses or curb the larceny which is the manifes-
tation of acquisitive modes of thought, the state can begin to wither

* Question: Then you don’t believe in compensatory spending?

Secretary Humphrey: What do you mean by that?

Question: In other words, increasing the level of government spendii^ durii^
a period in which business generally is declining. . .

Secretary Humphrey: No; I don’t think so, Joe. I don’t think you can spend
yourself rich.

—Transcript of Press Conference by former Secretary of the Treasury George M.
Humphrey, Congnssiorul Record, Jaanary 17 , 1957> f- ^ 5 -

* Communist Manifesto.

THE AFFLUENT SOCIETY

54

away. But first, unhappily, there was the revolution. A very large
number of people were never able to project their minds much be-
yond this discomforting prospect. And as Marx billed it—'. . . the
forcible overthrow of all existing social condition. Let the ruling
classes tremble . . .'‘—it was discomforting.

Ill

Nothing has ever been so badly understood as the influence of Marx.
That he seized the minds of millions is, of course, agreed. But it is
widely supposed that Marx’s influence ends with these faithful. In the
conventional wisdom his ideas are a kind of infection, like smallpox.
Either men get it and are permanently scarred, or they escape it
because of efiective inoculation and are tmtouched. Nothing could be
further firom the truth. Marx profoundly affected those who did not
accept his system. His influence extended to those who least supposed
they were subject to it.

In part this was the result of the breath-taking grandeur of Marx’s
achievement as an exercise in social theory. No one before, or for
that matter since, had taken so many strands of hiunan behaviour and
woven them together— social classes, economic behaviour, the
nature of the state, imperialism, and war were all here and on a great
firesco which ran &om deep in die past to fiu: into the future. On class
conflict, or imperialism, or the causes of ludonal war, Marx was
bound to be influential, for he was the only man who had ofl^ed an
explanation which was at all integrated with the rest of human
experience. Thus all American thought has been deeply influenced
by a Marxian view of imperialism. It could not be otherwise. The
break with British imperialism came on economic issues. To this day
the principal alternative to explaining imperialism in terms of econo-
mic self-interest is to argue the benevolence of the imperial power,
its commitment to the white-man’s burden, and its feeling dut the
natives arc not ready for independence. No one in the United States
is more suspicious of such a defence by the colonial power than the
right-wing Republican who is conditioned to search for die econo-
mic modvadon behind any argument.

‘ Communist Manifesto.

THE MARXIAN PALL

55

‘As an economic theorist Marx was first of all a very Icamed man/'i
His goals were those of a revolutionist, but his method was that of a
scholar and scientist. Accordingly his concepts helped all social
scientists in their perception of reality. In a world but little removed
from poverty, and where great store was set by wealth, it was inevit-
able that most conflict would have an economic cause. Nothing else
was nearly so worth quarrelling about. Even where there was some
other ostensible cause— love, honour, patriotism, or rchgion— a more
penetrating or cynical view could be expected to discern some eco-
nomic motive. This in simple outline was Marx’s materialistic con-
ception of history. Though it was not original with Marx— as he
made clear— he made it famous. It is something tliat the modem
businessman accepts as a matter of course. When he secs someone
agitating for change, either at home or abroad, he inquires, almost
automatically: ‘What is there in it for him?’ He suspects that the
moral crusades of reformers, do-gooders, liberal politicians, and
public servants, all their noble protestations notwithstanding, are
based ultimately on self-interest. ‘What’, he inquires, ‘is their
gimmick?’

Marx foresaw, in the process of capitalist concentration, tlie ten-
dency for the control of the capital resources of the commiuiity to
pass into fewer and fewer hands. As the matcriaUstic view of human
motivation is fundamental in American conservatism, so capitalist
concentration is a prime tenet of American liberalism. It is Marx, in
considerable measure at least, who agitates year in and year out for
the enforcement of the anti-trust laws.

In the central tradition of economic tlicory, the existence of social
classes— of capitalists, middle class, and proletarians— was only sur-
reptitiously conceded if at all. Yet classes obviously existed; so did
so mething that looked suspiciously like dass conflict. For a percep-
tion of these matters the world had also to rely on Marx.

Finally, Marx gained influence by heralding the truly terrifying
depression. In the central tradition, as noted, the depression was a
routine aflhetion. For Marx it was an increasingly devastating fact of
capitalist Hfe. In the end a depression would destroy (or at least mark

^Joseph A. Sduimpcter, apiUilim, Soculism and De mocracy (and ed.; New
York, Ibrper, ij>47)f P-

56 THE AFFLUENT SOCIETY

the destruction of) the system. On this, of all matters, it was difficult
to say that Marx was wrong for plainly by the nineteen-thirties
depressions were not routine. In 1934, in the third year of the Great
Depression, John Strachey, then the most articulate contemporary
Enghsh Marxist, surveyed the current economic situation and con-
cluded, not without satisfaction, that ‘ the whole capitahst world is on
its way to barbarism’.^ But the judgment of die most orthodox of
Enghsh economists in the same year, except in being tinged with
regret, was not different. Sir Arthur Salter concluded that ‘the defects
of the capitalist system have been increasingly robbing us of its
benefits. They are now dureatening its existence.'®

IV

Had Marx been mostly wrong, his influence would quickly have
evaporated. The thousands who have devoted their attention to
demonstrating his errors would have turned their attention else-
where. But on much he was notably right, especially in relation to
his time. The latter point is worth emphasizing. Most economic
philosophers needed only to be right as regards their own time. No
one defends Adam Smith in his conviction diat corporations— joint
stock companies— had no future. But the Marxists require that Marx
be right not only for his own time but for all time. This is a truly
formidable test.

And it was because Marx was so manifesdy right on some things
that few could suppress the insistent question: Might he not be right
on other things— including the prospect for capitalism itself? Might
it be that Marx faced facts while others sought the dubious shelter of
wishful thinking? Such thoughts, as much as the convictions of his
converts, were the measure of Marx's influence. In those who resisted
behef he still had an unparalleled capacity to inspire doubts. Lurking
just beneath tlic sturface in the mind of every non-Marxian— everyone
at least who was sensitive to any form of thought— was the question:
Am I Dr. Pangloss?

®Jolm Sttachey, The Cmii^ Struggle for Power (4th cd.; London, GoUanez,
1934). p. 8 .

* Arthur Salter, Recovery: The Second Effort (London, G. Bell & Sons, 1934),
p. 209.

THE MARXIAN PAM

57

And to this doubt die converts also contributed. Wlicrcas those
who remained in the central tradition of economics wondered, the
Marxists did not. They were certain. No wish for a comfortable and
non-violent future fathered their thoughts. They were willing to face
the prospect of die progressive inimiseration of the masses, worsening
economic crises and, in the end, bloody revolution. The unlovelincss
of these prospects, and die fact diat diey were being faced, cstabhshed
die Marxist as the profound reahst, die man who was entirely with-
out illusion. This evident realism was reinforced by moral passion.
‘The religious quality of Marxism . . . explains a characteristic atti-
tude of the orthodox Marxist toward opponents. To him, as to any
believer in a faith, the opponent is not merely in error but in sin.
Dissent is disapproved of not only intellectually but also morally.’*
The man who argues -with a Marxist has always been assaulting a
rock fortress with a rubber flail.

Lasdy, it was always possible to dismiss those who beUeved Marx
wrong as being guilty of a failure of understanding. Marx is not easy
to imderstand. Those who thought him wrong had failed to do so.
Thus one of Marx’s reasons for the capitalist crisis, as noted, was the
tendency for the rate of profit to fall with con tinuing capital accu-
mulation. Marx was as insistent on die importance of profit for
investment and production as any president of the National Associa-
tion of Manufacturers. The falling rate of profit would lead to
recurrent interruptions of expansion and these would be of increasing
severity and duration.

In diis century profits have shown no tendency to fall, and capital
accumulation has continued apace. As a result, die declining rate of
profit cannot be taken seriously as a cause of depression. One of
Marx’s sympathetic modern interpreters lias been moved to conclude
that ‘liis explanation of the falling tendency of profits explains
nothing at all’.* But few Marxists make diis concession. Marx was not

* Sdiumpeter, Cofitatism, Socutlism mi Democracy, p. 5. In the central tradition
by contrast, such passionate belief was thought inconsistent with scientific ration-
alism. Not exclusively, to be sure. Marx once observed with some justice that
‘Economists are like dwologians. . . . Every religion other than their own is the
invention of man, whereas dieir own particular brand of religion is an emanation
from God.’ (From The Misery of Philosophy, quoted by Strachey, The Comins
Stable for Power.) * Joan Robinson, An Essay on Marxim Economics, p. 42.

THE APPLUBNT SOCIETY

58

in error; nor was it because he based his observation on the last
century when the rate of return seemed to be showing a tendency to
fall. Rather the dissenter has ^led to see the full subtlety and com-
plexity of Marx’s argument. He has somehow over-simplified or
vulgarized Marx’s position.

Much has been written of the appeal of Marx— and, in somewhat
the same vein, of communism— to intellectuals. How, in particular,
can a doctrine that has so obviously acquired the standing of a dogma
be attractive to inquiring, rational minds? The answer is a complex
one. Apart from the obvious fact that Marx for Marxists is the con-
ventional wisdom, there is the seeming realism, the certainty and
security of the defenders and the large component of vivid truth. But
much of Marx’s strei^th has always been in the contention of his
followers that those who thought him wrong were really themselves
obtuse, simple— or hteral-minded. These are terrible charges; in-
numerable intellectuals have been unwilling to risk them. How mudi
better to persuade oneself and others of one’s ability to see below the
surface. This might mean agreeing that Marx meant what he did not
say, but it was proof that one wasn’t incapably dull. Thus acceptance
of Marx became not a matter of willingness to follow dogma into
obvious umeahty and error. Rather it was a question of whether the
individual was willing to adventure into the subtle and inverted as
distinct firom the surface implications of Marx’s words, and had the
ability to do so. For intellectuals die lure was strong. This too was a
source of Marx’s influence.

V

The time has come for a summing up. Up to twenty or twenty-five
years ago— say the middle years of die thirdes— the broad impact of
economic ideas is clear. It could not but leave a man with a sense of
the depth, pervasiveness, and burden of the economic problem and,
on the whole, with the improbability of a happy outcome. ’Depend
on it,’ Dr. Johnson observed, ‘when a man knows he is going to be
hanged in a fortnight, it concentrates his mind wonderfully.’^ For the

^ The saying owes its modem fame to Winston Churchill, who noted that hi
mind had been so focused by the prospect of the invasion of Britain in 1940.

THE MARXIAN PALL

59

same reasons men’s minds were focused on the perils of economic life.

In particular, although it was no longer the lesson of the central
economic tradition that men would starve, neither was it the lesson
that they would do very well. Privation was still normal. Men might
lift themselves by lifting their marginal product; widi increasing
efficiency and increasing supplies of capital, marginal productivity
and hence wages might rise. But no one could suppose that the result
could be more than bardy adequate. Certainly no one could suggest
that any opportunity for such improvement could be overlooked.
On the contrary, to relax such effort in the slightest would be ex-
treme social dereliction. The privation, already great, would be
greater— and unnecessarily so. The man of conscience and compas-
sion must see that efficiency is increased by all possible means. To do
less was to be profoundly callous, even cruel.

Privation is also enhanced by the intransigent inequality of the
income. The miserable consumption of the poor is partly the result
of the ostentatious demands of the rich. There isn’t enough for both,
and the latter get far more than diey need. If possible, something
should be done about inequality, for no sensitive man could be in-
different to the social strains and conflicts that it was producing and
seemed likely to produce as the proletariat became increasingly con-
scious of its inferior position. But could anything serious really be
done about it?

Finally, there was die nerve-racking problem of insecurity. The
competitive model made episodic unemployment for the worker,
and occasional insolvency for die firmer or businessman, a part of die
system. This insecurity was enhanced by the growing severity of
depressions and now in the thirties by the most devastating depres-
sion of all. This latter was especially troublesome because the contem-
porary theory dismissed it as selfcorrecting. If selfcorrecting it was
inevitable, and if inevitable it was intolerable.

Clearly there was much to bring productivity, inequality, and
msecurity to the centre of men’s minds and to make them a pre-
occupying concern. And if there was any tendency in the central
tradition of economics to conclude that all might in the end work out
for die best, diere were also voices from the wings to say it couldn’t
be so. From the right was the echo of the Social Darwinists saying

6o

THE AFFLUENT SOCIETY

Struggle is not only inevitable but good. From the Marxist world, in
tones of thunderous conviction, came the warning that the inequality
and the insecurity would increase and increase until, in the end, their
victims would destroy tlic whole edifice and, by implication, quite a
few of its favoured inliabitaiits.

These— -productivity, inequality, and insecurity —were tlic ancient
preoccupations of economics. They were never more its preoccupa-
tions than in the nineteen-thirties as the subject stood in a great valley
facing, all unknowingly, a mountainous rise in well-being. We have
now had that mountainous rise. In very large measure die older pre-
occupations remain. Wc should scarcely be surprised. This pre-
eminently is an occasion when wc would expect the conventional
wisdom to lose touch witli the reality. It has not disappointed us.

That is not to say tliat the change has had no effect on conventional
attitudes. Especially on equality and insecurity there have been im-
portant modifications. To these wc now turn.

CHAPTER SEVEN

#

Inequality

Few diings have been more productive of controversy over die ages
than the suggestion that the rich should, by one device or another,
share their wealth with diose who arc not. With comparatively rare
and usually eccentric exceptions, the rich have been opposed. The
grounds have been many and varied and have been principally noted
for the rigorous exclusion of die most imporunt reason, which is the
simple unwilUngness to give up die enjoyment of what they have.
The poor have generally been in favour of greater equality.

As the last chapters have shown, the economic and social pre-
occupation with inequality is deeply grounded. In the competitive
society— the society of the central tradition of economics in descent
from Ricardo— there was presumed to be a premium on efficiency.
The competent entrepreneur and worker were automatically re-
warded. The rest, as automatically, were punished for their incom-
petence or sloth. If labour and capital and land were employed with
high efficiency then, pro tanto, nothing more, or not much more,
could be got out of the economy in the short run by way of product.
And longer-run progress did not necessarily benefit the average man ;
in the original doctrine its fruits accrued to others.

So if people were poor, as in fact they were, dieir only hope lay in
a redistribution of income, and especially that which was the product
of accumxilated wealth. Much though Ricardo and his followers
mi^t dissent, there were always some— and the number steadily
grew— who believed that redistribution might be possible. (Ricardo
and those who followed him in die central tradition were never im-
mtme from the suspicion that diey were pleading a special interest.)

6t

62

THE AFFLUENT SOCIETY

All Marxists took a drastic redistribution for granted. Consequently,
tliroughout the nineteoith century the social radical had no choice
but to advocate the redistribution of wealth and income by one
device or another. If he wanted to change things this was his only
course. To avoid diis issue was to avoid all issues.

The conservative defence of inequality has varied. There has
always been the underlying contention that, as a matter of natural
law and equity, what a man has received save by overt larceny is
rightfully his. For Ricardo and his immediate followers die luxurious
income of landlords and of capitalists was the inevitable arrangement
of things. One could tamper with it but only at die eventual price of
disrupting the system and making the lot of everyone (including the
poor) much worse.

This was essentially the passive defence. With time (and agitation)
the case for inequahty became a good deal more functional. The
undisturbed enjoyment of income was held to be essential as an in-
centive. The resulting effort and ingenuity would bring greater pro-
duction and greater resulting rewards for all. Inequality came to be
regarded as almost equally important for capital formation. Were
income vndely distributed, it would be spent. But if it flowed in a
concentrated stream to the rich, a part would certainly be saved and
invested.

There were other arguments. Excessive equality makes for cultural
uniformity and monotony. Rich men are essential if there is to be an
adequate subsidy to education and the arts. Equality smacks of com-
munism and hence of atheism and therefore is spiritually suspect. In
any case, even the Russians have abandoned egalitarianism as un-
workable. Finally, it is argued that by means of the income tax we
have achieved virtual or (depending on the speaker) entirely exces-
sive equaUty. The trend for the future must be toward restoring an
adequate measure of inequality by well-conceived tax reductions
affecting the upper surtax brackets.

The cultural misfortunes foom excessive equality cannot be pressed
too far. As Tawney observed: ‘Those who dread a dead-level of
income or wealth ... do not dread, it seems, a dead-level of law and
order, and of security of life and property. Ihey do not complain
that persons endowed by nature with unusual qualities of strei^th,

INEQUALITY

63

audacity, or cunning are prevented from reaping the full fruits of
these powers.’^ And in fret in the conventional wisdom the defence
of inequality does rest primarily on its functional role as an incentive
and as a source of capital.

Thus the egalitarianism of the present tax structure is thought to
be seriously dampening individusd effort, initiative, and inspiration
or is in dai^er of doing so. It ‘destroys ambition, penalizes success,
discourages investment to create new jobs, and may wcU turn a
nation of risk-taking entrepreneurs into a nation of softies . . Tt

destroys the incentive of people to work It makes it increasingly

difficult, if not impossible, for people to save. ... It has a deadening
effect on the spirit of enterprise . . . which has made America.’®

However, this case is not an impeccable one. Income taxes have
been at present levels for approach^g two decades. These in general
have been years of rapid economic growth. Those who view tlie
taxes with most concern point to this progress with most pride. Nor
would many businessmen wish to concede that they arc putting
forth less than didr best efforts because of insufficient pecuniary
incentive. The typical business executive makes his way to die top by
promotion over the heads of his fellows. He would endanger his
chance for advancement if he were suspected of goldbricking because
of his resentment over his taxes or for any other reason. He is
expected to give his best to his corporation, and usually he does.

To give individuals large incomes to encourage savings also has
elements of illogic. The rich man saves because he is able to satisfy
all his wants and then have something over. Such saving, in other
words, is die residual after luxurious consumption. This obviously is
not an especially efficient way to promote capital formation. More-
over, the empirical evidence on the effect of egalitarianism on capital
formation is uncertain. England is often cited as an unfortunate
example. But Norway, an even more egalitarian country, has had
since the war one of the highest rates of capital formadon and of

® R. H. Tawney, Equality (4th cd.; London, Allen & Unwin, 1952). P- 85-

® ‘Taxes and America’s Future.’ Address by Fred Maytag II, before National
Association of Manufacturers, December i, 1954.

*"I 1 ie Relation of Taxes to Economic Growth.’ Address by Ernest L. Swigert,
before National Association of ManuActurers, December 6, 1956.

64 THB AFFLUENT SOCIETY

economic growth of any country in the non-communist world.’
Middle eastern countries where inequality is greatest are among
those widi the lowest rate of capital formation. All or most gets
spent.

The formal hbcral attitude toward inequality has changed little
over the years. The liberal has partly accepted the view of the well-
to-do that it is a trifle uncoutli to urge a policy of soaking the rich.
Vet on the whole the rich man remains the natural antagonist of die
poor. Economic legislation, above all tax policy, continues to be a
contest between the interests of the two. No other question in eco-
nomic policy is ever so important as the eflect of a measure on the
distribution of income. The test of the good liberal is stiU that he is
never fooled and that he never yields on issues favouring the wealthy.
Other questions occupy liis active attention, but this is the constant.
Behind liim, always challenging him, is die cynical Marxian whisper
hinting that whatever he does may not be enough. Despite his
efforts, capitahst concentration will keep on, and the wealdiy will
become wealthier and more powerful. They lose battles but win
wars.

II

However, few things are more evident in modem social history than
the decline of interest in inequahty as an economic issue. This has
been particularly true in the United States. And it would appear,
among western countries, to be the least true of the United Kingdom.
While it continues to have a large rituahstic role in the conventional
wisdom of conservatives and liberals, inequality has ceased to pre-
occupy men’s minds. And even the conventional wisdom has made
some concessions to this new state of affoirs.

On the fact itself— that inequahty is of declining concern— it is
only necessary to observe that for some fifteen years no serious effort
has been made to alter the present distribution of income. Although
in the semantics of American Uberalism there is often a tactful silence
on the point, since nothing so stin conservative wrath, the principal
pubhc device for redistributing income is the progressive income tax.

’ Alice Boutneuf, Norway: The Flamed Revival (Cambridge, Mass., Harvard
University Press, 1958).

INEQUALITY

65

Not since World War II has there been a major effort to modify this
tax in the interest of greater equality. Loopholes have been opened
and a few closed. Liberals have not, however, proposed any impor-
tant new steps to make die tax more progressive and hence more
egalitarian. And conservatives, while they have won numerous secon-
dary victories, have not been able to mount any major attack on the
tax itself. On die contrary, although roughly the present nominal
surtax rates were put into effect during the war, widi die presump-
tion that they were a temporary measure for insuring equality of
wartime sacrifice, they are now regarded by many and perhaps by
most people as permanent.

As part of the present compromise, hberals do not seek to make
current taxes more progressive or even passionately to eliminate
existing inequities and loopholes in their appheation. They would,
however, rally in opposition to any general reduction in rates on the
higher income brackets. Those who believe the tax has gone too far
in enforcing equality are more vocal. Appeals for public sympathy
and support, and clarion calls for courage and action, come regularly
from the well-to-do. ‘The hour is late, but not too late. There is no
excuse for our hesitating any longer. Widi all the strength of equity
and logic on our side, and with the urgent need for taking the tax
shackles off economic progress, initiative is ours if we have the
courage to take it.*^ But not even a conservative administration such
as that of President Eisenhower thought it wise to tackle the question
of surtax reduction on a wide front.

Apart from the income tax almost no legislation has been enacted
or even discussed in recent years which has as its main point the
reduction of inequality. Fifty years ago, at the height of the debate
over socialism and capitalism, it would have been hard to imagine
there was any other issue.

The decline in concern for inequality cannot be explained by the
triumph of equality. Although this is regularly suggested in the con-
ventional wisdom of conservatives, and could readily be inferred
from the complaints of businessmen, inequality is still great. In 1955
the one-tenth of families and unattached individuals with the lowest
incomes received after taxes about one per cent of the total money
^ Maytag, 'Taxes and America’s Future*.

D

66

THB AFFLUENT SOCIETY

income of the country; the tenth with the highest incomes received
27 per cent of the total, which is to say their incomes averaged
27 times as much as the lowest tenth. The half of the households with
the lowest incomes received, after taxes, only 23 per cent of all
money income. The half with the highest incomes received 77 per
cent. In 1954 only about three per cent of all families had incomes
before taxes of more than $15,000. They received, none the less,
per cent of total income. At the other extreme, i6’7 per cent had
before tax incomes of less than two thousand and received only
3*6 per cent of the income.^ Vast fortunes are still being made out of
natural resources and especially out of oil— where the famous deple-
tion allowance of 27*5 per cent effectively frees that proportion of oil
income, and sometimes much more, from all taxation. Present laws
are also notably favourable to the person who has wealth as opposed
to the individiul who is only earning it. With a htde ingenuity, the
man who is already rich can ordinarily take his income in the form
of capital gains and limit his tax liability to 25 per cent of his income.
In addition, unlike the man who must earn, he is under no compul-
sion to acquire a capital stake, either for old age, family, or the mere
satisfaction it brings, since he already has one. Accordingly he need
not save. Yet none of these matters arouses the kind of concern wliich
leads to agitation and action.

Ill

The first reason why inequality has &ded as an issue is, without much
question, that it has not been showing the expected tendency to get
worse. And thus the Marxian prediction, which earlier in this century
seemed so amply confirmed by observation, no longer inspires the
same depth of fear. It no longer seems likely that the ownership of
the tangible assets of the republic and the disposal of its income will
pass into a negligible number of hands despite the approving senti-
ment of those who would abandon the progressive income tax or

^ U.S. Depattmmt of Commerce. Statistical Abstract of the United States, 1957,
p. 309. The after-tax percentage distributions ate ffom Board of Governors of the
Federal Reserve System and are based on the surveys of consumer finances. The
before-tax data are estimates by the Department of Commerce.

INEQUALITY

67

widen its present loopholes. Meanwhile, there has been a modest
reduction in the proportion of disposable income going to those in
the very highest income brackets and a very large increase in the pro-
portion accruing to people in the middle and lower brackets. While
ta x es have restrained the concentration of income at the top, full
employment and upward pressure on wages have increased well-
being at the bottom. In 1928 disposable income, i.e. income after
taxes, of the i per cent of the individuals with the highest income was
estimated to account for 19 per cent of all income. By 1946 it
accounted for a little less than 8 per cent. In 1928 die 5 per cent with
the highest incomes received over a third of all income; by 1946
their share was about 18 per cent.^ The war and post-war years,
especially, were a time of rapid improvement for those in the lower
bracket. Between 1941 and 1950 the lowest fifth had a 42 per cent
increase in income; the second lowest fifth had an increase of 37 per
cent. The detailed figures for these years are as follows:

AVERAGE FAMILY INCOME AFTER INCOME TAXES

[In dollars of 1930 purchasing power)*

1941 1950

$ $

Per cent dusnge
1941-50

Lowest fifth of all families

750

1,060

+42

Second lowest

1.730

2.360

+37

Third lowest

2,790

3.440

+24

Second highest

4.030

4.690

+16

Highest

8.190

8,880

+ 8

Highest 5 per cent

15.040

14.740

— 2

Emulation or, when this is frustrated, envy have loi^ played a
large role in the economist’s view of human motivation.® So long as
one individual had more than another, the second was presumed to
be dissatisfied with his lot. He strove to come abreast of his more

® The data are &om National Bureau of Economic Rescardi. Note that these
figures are not for households but for individuals.

® From Selma Goldsmith, Geoi^ Jaszi, Hyman Kaitz, and Maurice Liebenberg,
‘Size Distribution of Incomes since the Mid-thirties.* Review of Economics and
Statistics, vol. XXXVI (February 1954).

» Chapter XI.

68

THB AFFLUENT SOCIETY

&voure(l contemporary; he was deq>ly discontented if he £uled. It
may be, however, that these disenchanting traits are less cosmic than
has commonly hem supposed. Envy almost certainly operates effi-
ciently only as regards nearby neighbours. It is not directed toward
the distant rich. Hoice, at a time when the individual's real income is
rising, the £ict that imknown New Yorkers or Texans are exceed-
ingly wealthy is not, probably, a matter of prime urgmcy. It becomes
easy, or at least convenient, to accept die case of the conventional
wisdom which is that the rich in America are highly functional and
also much persecuted members of the society. Moreover, as noted, to
commit on the wealth of the wealdiy, and certainly to propose that
it be reduced, has come to be considered bad taste. The individual
whose own income is going up has no real reason to incur the oppro-
brium of this discussion. Why should he identify himself, even
remotely, with soapbox orators, malcontoits, agitators. Commun-
ists, and other undesirables?

Things would be different were the incomes of the well-to-do
rising and those of the rest of the people stationary or filing. This
has been well illustrated by die reactions of the fumers who, though
in many cases not badly off by past standards, during the middle
fifties sudered a reduction of their income at a time when the incomes
of nearly all other groups were rising. They were not reconciled
either to their fate or to a Secretary of Agriculture who sought its
acceptance.

IV

Another reason for the decline in interest in inequality, almost cer-
tainly, is the drastically altered polidcal and social position of die ridi
in recent times. Broadly speaking, there are three basic benefits firom
wealth. First is the satisfaction in the power with which it endows die
individual. Second is the physical possession of the things which
money can buy. Third is the distinction or esteem that accrues to the
rich man as the result of his wealth. All of these returns to wealth
have been gready circumscribed in the last fifty years and in a
maimer which also vasdy reduces the envy or resentment of the well-
to-do or even the knowledge of their existence.

As rec^dy as a half-century i^o the power of the great business

INEQUALITY

69

firm was paramount in the United States and so, accordingly, was the
power of the individual who headed it. Men like Morgan, die Rocke-
feller executives, Hill, Hairiman, and Hearst had great power in the
meaningful sense of the term, which is that they were able to direct
the actions and command the obedience of coundcss other indi-
viduals.

In the last half-century the power and prestige of the United States
government have increased. If only by the process of division, this
has diminished the prestige of the power accruing to private wealth.
But, in addition, it has also meant some surrender of audiority to
Washington. Furthermore, trade unions have invaded the power of
the entrepreneur from another quarter. But most important, the
professional manager or executive has taken away firom the man of
wealth the power that is implicit in running a business. Fifty years
ago Morgan, Rockefeller, Hill, Harriman, and the others were the
undisputed masters of the business concerns they owned, or it was
indisputably in their power to become so. Their sons and grandsons
stiU have the wealth, but with rare exceptions the power implicit in
the running of the firm has passed to professionals. Nor has any
equivalent new generation of owning entrepreneurs come along.

Wlieii the rich were not only rich but liad the power that went
with active direction of corporate enterprise, it is obvious diat wealth
had more perquisites than now. For the same reasons it stirred more
antagonism. J. P. Morgan answered not only for his personal wealth
but also for the behaviour of the United States Steel Corporation
which he had put together and which he ultimately controlled. As a
man of corporate power he was ako exceedingly visible. Today
shares of the United States Steel Corporation are still the foundation
of several notable fortunes. But no sins of the Corporation are visited
on these individuak, for they do not manage the company and
almost no one knows who they are. When the power that went with
active business direction was lost, so was the hostility.

The power that was once joined with wealth has been impaired in
a more intimate way. In 1194 the crusading knight, Henry of
Champagne, paid a visit to the headquarters of the Assassins at the
castle at al-Kahf on a rugged peak in the Nosairi Mountains. The
Assassins, though a fanatical Moslem sect, had, in general, been on

70 THB AFPtUBNT SOCIBTY

good terms with the Christians, to whom they often rendered, by
arrang emen t, the useful service of resolving disputes by eliminating
one of the disputants. Henry was sumptuously received. In one of the
more impressive entertainments a succession of the loyal members
of the cidt, at a word from the Sheik, expertly immolated them-
selves. Before and ever since, the willing obedience of a household
coterie has been a source of similar satisfrction to those able to com-
mand it. Wealth has been the most prominent device by which it
has been obtained. As may indeed have been the case at al-Kahf, it
has not always endeared die master to the men who rendered it.

• In any case, such service requires a reservoir of adequately obedient
or servile individuals. The drying up of this reservoir, no less than the
loss of wealth itself, can rob wealth of its prerogatives. The increase
in the security and incomes of Americans at the lower income levels
has effectively reduced— indeed, for many purposes, eliminated— the
servile class. And again the reciprocal is that those who no longer
work for the rich (or who have done so or who fear that they might
be forced to do so) no longer feel the resentment which such depen-
dence has induced.

V

The enjoyment of physical possession of things would seem to be one
of the prerogatives of wealth which has been little impaired. Pre-
sumably nothing has happened to keep the man who can afford them
from enjoying his Rembrandts and his home-grown orchids. But
enjoyment of things has always been intimately associated with the
diird prerogative of wealth which is the distinction that it confers. In
a world where nearly everyone was poor, this distinction was very
great. It was the natural consequence of rarity. In England, it is
widely agreed, the ducal families are not uniformly superior. There
is a roi^hly normal incidence of intelligence and stupidity, good
taste and bad, and morality, immorality, homosexuality, and incest.
But very few people are dukes or even duchesses, althougli the latter
have become rather more frequent with the modem easing of the
divorce laws. As a result, even though they may be intrinsically un-
exceptional, they are regarded vtuth some awe. So it has long been

INEQUALITY

71

with the rich. Were dukes numerous, their position would deteri-
orate. As the rich have become more numerous, they have inevitably
become a debased currency.

Moreover, wealth has never been a sufficient source of honour in
itself. It must be advertised, and the normal medium is obtrusively
expensive goods. In the latter part of the last century in die United
States this advertisement was conducted with virtuosity. Housing,
equipage, female adornment, and recreation were all brought to its
service. Expensiveness was keenly emphasried. ‘We are told now
that Mr. Gould’s “ $500,000 yacht” has entered a certain harbour, or
that Mr. Morgan has set off on a journey in his “ $100,000 palace
car”, or that Mr. Vanderbilt’s “ $2,000,000 home” is nearing com-
pletion, with its “$50,000 paintings” and its “$20,000 bronze
doors’’.’^ The great houses, the great yachts, the great balls, the
stables, and the expansive Jewel-encrusted bosoms were all used to
identify the individual as having a claim to the honours of wealth.

Such display is now pass^. There was an adventitious contributing
cause. The American well-to-do have long been curiously sensitive
to fear of expropriation— a fear which may be related to the tendency
for even the mildest reformist measures to be viewed, in the conser-
vative conventional wisdom, as the portents of revolution. The
depression and especially the New Deal gave the American rich a
serious fright. One consequence was to uffier in a period of marked
discretion in personal expenditure. Purely ostentatious outlays,
especially on dwellings, yachts, and females, were believed likely to
incite the masses to violence. They were rebuked as unwise and im-
proper by the more discreet. It was much wiser to take on the pro-
tective coloration of the useful citizen, the industrial statesman, or
even the average guy.*

* Matthew Josephson, The Robber Barons (New York, Harcoort, Brace & Co.’
1934), p. 330. Josephsoa is paraphrasing W. A. CroiTut, Conunodore Vanderbilt’s
biographer, writing in 1885.

* Cf. C. Wright Mills, The Power Elite (New York, Oxford University Press,
1956), p. 1 17. Mr. Mills suggests that in the depression years this effort to provide
protective coloration led to the recruiting of technicians and corporate managers
as front men behind which the well-to-do could survive in peace. Not uncharac-
teristically, I tbinlr, Mr. Mills reads too much design and contrivance into such
change.

72

THE AFPIUBNT SOCIETY

However, deeper causes were at work. Increasingly in the last
quarter-century die display of expensive goods, as a device for sug-
gesting wealth, has been condemned as vulgar. The term is precise.
Vulgar means: ‘Of or pertaining to the common people, or to the
common herd or crowd.’ And this explains what happened. Lush
expenditure could be afforded by so many that it ceased to be useful
as a mark of distinction. A magnificent, richly upholstered, and ex-
tremely high-powered car conveys no impression of wealth in a day
when such cars are mass-produced by the thousands. A house in
Palm Beach is not a source of distinction when the rates for a thou-
sand hotel rooms in Miami Beach rival its daily upkeep. Once a
sufSciendy impressive display of diamonds could create attention
even for die most obese and repellent body, for they signified mem-
bership in a highly privileged caste. Now the same diamonds are
afforded by a television star or a talented harlot. Modem mass com-
munications, especially the movies and television, ensure that the
populace at large will see the most lavish caparisoning on die bodies
not of the daughters of die rich but on the daughters of coal-miners
and commercial travellers, who struck it rich by their own talents or
some facsimile thereof. In South America, in the Middle East, to a
degree in socialist India, and at Nice, Cannes, and Deauville, osten-
tatious display by the rich is still much practised. This accords with
expectadons. In these countries most people are sdll, in the main,
poor and unable to afford the goods which advertise wealth. There-
fore ostentation continues to have a purpose. In not being accessible
to too many people it has not yet become vulgar.

The American of wealth is not wholly without advantages in his
search for distinction. Wealth still brings attention if devoted to cul-
tural and technical pursuits or to hobbies with a utilitarian aspect.
A well-to-do American may gain in esteem &om an admirably run
farm, although never from an admirably manicured estate. He will
be honoured for magnificent and imaginative cow stables, although
not fi>r luxurious horse stables. Although wealtii aids a public career
those who too patently rely on it are regarded as slightly inferior
public citizens. A Harriman or a Lehman who is elected to public
office enjoys a prestige fer in excess of an Aldrich or a Whitney whose
appointment to an ambassadorial position, however justified on

INEQUAtlTY

73

merit, might have been less certain in the absence of sizeable campaign
contributions. In sum, although ostentatious and elaborate expendi-
ture, in conjunction with the wealth that sustained it, was once an
assured source of distinction, it is so no longer. The effect on attitudes
toward inequaHty will be evident. Ostentatious expenditure focused
the attention of die poor on the wealth of the wealthy, for this of
course was its purpose. With the decline of ostentation, or its vulgar-
ization, wealth and hence inequaHty were no longer flagrantly adver-
tised. Being less advertised they were less noticed and less resented.
The rich had helped to make inequaHty an issue. Now they were no
longer impelled to do so.

There were similar consequences from the flict that the rich man
now had to compete for esteem. Once the intellectual, poHtician, or
man of general ambition saw the rich man achieve distinction with-
out efibrt and in contrast with his own struggle. He reacted by help-
ing to focus the resentment of the community as a whole. Now he
saw the man of wealdi forced to compete for his honours. In this
competition the rich man retained undoubted advantages, but he did
not automatically excel. Nothing could operate more effectively to
dry up the supply of individuals who otherwise wotild make an
attack on inequaHty a career. By graduating into the ranks of the
professional managers, and after making his way up through the
hierarchy of the modem corporation, the ambitious man could ex-
pect to compete on tolerably equal terms with the grandson of the
founder.

It would be idle to suggest that the man of wealth has no special
advantages in our society. Such propositions are the one-day wonders
of the conventional wisdom, and those who offer them have a brief
but breath-taking reputation as social prophets. This itself suggests
that such findings assiiage some sense of guilt. But it does seem clear
that prestige and power are now far more intimately identified with
those who, regardless of personal wealth, administer productive
activity. The Wgh corporate official is inevitably a man of conse-
quence. The rich man can be quite inconsequential and often is.

74

THB AFFLVBNT SOCIETY

VI

In the Ricardian world, as noted, progress required profits, and its
fhnts accrued to the landlords. Economic advance— expanding out-
put— did not ordinarily help the common man. His only hope lay in
reforms that Ricardo and his followers would have considered highly
destructive or, alternatively, in a drastic overthrow of the system.
Economic advance still holds litde promise of betterment for the
average man in many if not most countries. On Andean haciendas,
in the Arab lands, and in India and China at least until recent times
it mattered little to the man who tilled the land whether the product
increased. His own share was minute; an increase in product is not
important if aU but a minute fraction goes to someone else. And
matters may be worse: any surplus over the barest need may be
absorbed, as the result of an ad hoc revision of the rules, by the land-
lord, merchant, or moneylender. This is still the Ricardian world,
and in it the obvious hope for improvement Ues in a dif&rcnt distri-
bution of income. For the same reason, until the share of the ordinary
man in the product is increased, his incentive to increase production
—to adopt better methods of cultivation, for example- is slight or
nil. The people of the so-called backward countries have frequently
heard firom their presumptively more advanced mentors in the eco-
nomically more advanced lands that they should be patient about
social reform, with all its disturbing and even revolutionary implica-
tions, and concentrate on increasing production. It can be remarkably
inappropriate advice. Reform is not something that can be made to
wait on productive advance. It may be a prerequisite to such advance.

In the advanced country, in contrast, increased production is an
alternative to redistribution. And, as indicated, it has been the great
solvent of the tensions associated with inequality. Even though the
latter persists, the awkward conflict which its correction implies can
be avoided. How much better to concentrate on increasing ouq>ut, a
programme on which both rich and poor can agree, since it benefits
both.

That among those who might be subject to redistribution this
doctrine has something approaching the standing of divine revelation

INBQUAtlTY

7S

is perhaps not entirely surprising. For many yean the relationship of
businessmen to economists in the United States has been character-
ized by a degree of waspishness. The economist has shown a pre-
disposition to favour low tarifis, the income tax, the anti-trust laws,
and quite frequently trade unions. This has made him, at the mini-
miun, an inconvenient fiiend. But increased output as a substitute for
greater equality has lately become the basis for a notable rapproche-
ment, ‘ From a doUars-and-cents point of view it is quite obvious that
over a period of years, even those who find themselves at the short
end of inequality have more to gain from faster growth than firom
any conceivable income redistribution.*^

Some have reacted with slightly more suspicion. Over the cen-
turies those who have been blessed with wealth have developed
many remarkably ingenious and persuasive justifications of their
good fortune. The instinct of the hberal is to look at these explana-
tions with a rather unyielding eye. Yet in this case the facts are
inescapable. It is the increase in output in recent decades, not the
redistribution of income, which has brought the great material in-
crease, the well-being of the average man.* And, however suspi-
ciously, the liberal has come to accept the fact. As a result, die goal
of an expanding economy has also become deeply embedded in the
conventional wisdom of the American left. The beneficent effects of
such an economy, moreover, are held to be comprehensive. Not only
will there be material improvement for the average man, but there
will be an end to poverty and privation for all This latter, in fact,
is suspect. Increasing aggregate output leaves a self-perpetuating

* ‘Leatning to Multiply and to Divide.’ Address by R.oger M. Blough, Chair-
man of the Board of the United States Steel Corporation, quoting Professor
Henry C. Wallich of Yale University, January 15, 1957.

* hi the 1900-9 employed workers as a class received an estimated 55 per

cent of all income. By the decade of 1930-9 it had increased to 67 per cent since
which time it has evidently been more or less stable. A 67 instead of a 5$ per cent
share of the total income paid out in the first decade would not have meant a very
great inrrr^ |u» , On the other hand a 55 per cent share of present income would still
be a huge advance over what workers received in the first decade. Calculations are
from Gale Johnson, ‘The Functional Distribution of Income in the United States,
1850-1952’, Review of Economics and Statistics, vol. XXXVI (May i 954 }- The
estimates are rough.

76 THE AFFLUENT SOCIETY

marg in ofpovcTfy at die very base of die income pyramid. This goes
largdy unnoticed, because it is the fate of a voiceless minority. And
liberals have long been accustomed to expect die poor to speak in the
resoimding tones of a vast majority. To these nutters it will be neces-
sary to return.

For the moment we need only notice that, as an economic and
social goal, inequality has been declining in urgency, and this has had
its reflection in the convmtional wisdom. The decline has been for a
variety of reasons, but in one way or another these are all related to
the fact of increasing production. Production has eliminated the more
acute tensions associated with inequality. And it has become evident
to conservatives and liberals alike that increasing aggregate output is
an alternative to redistribution or even to die reduction of inequality.
The oldest and most agitated of social issues, if not resolved, is at least
largely in abeyance, and the disputants have concentrated their
attention, instead, on the goal of increased productivity. This is a
change of far-reaching importance. Our increased concern for pro-
duction in modem times would be remarkable in itself. But it has
also pre-empted die field once occupied by those who disputed over
who should have less and who should have more.

CHAPTER EIGHT

«

Economic Security

Few matters having to do with economic life have been so much
misundexstood as the problem of economic security. And in remark-
able degree the misiuiderstanding persists.

In the model of the competitive society sudi insecurity was inher-
ent. The individual producer or worker might, at any time, suffer a
sudden decline in his fortunes. This could be the result of laziness or
incompetence which would lose him his customers or his job. But the
best of men might suffer from a sudden change in consumer tastes or
as the result, not of their own inadequacy, but of that of their em-
ployer. These impredictablc changes in fortime were both inevitable
and useful. They were inevitable, for they were part of the capacity
of the system to accommodate itself to change. As requirements and
wishes changed, men were employed in new places and disemployed
in the old. Capital was sought in the new industries and written off*
as a loss in the old. The insecurity was useful, for it drove men—
businessmen, workers, the selfremployed— to render their best and
most efficient service, for severe punishment was visited impersonally
on those who did not.

However, this insecurity, valuable though it seemed in principle,
was cherished almost exclusively either in the second person or in the
abstract. Its need was thought urgoit for inspiring the efforts of other
persons or people in general. It seldom seemed vital for the individual
himself. Restraints on competition and the free movement of prices,
die principal source of uncertainty to business firms, have been
principally deplored by university professors on lifetime appoin^•
ments. Such security of tenure is deemed essential for finitful and

77

78 THE AFFLUENT SOCIETY

unremitting thought. The preoccupation of worken with unemploy-
ment insurance or old age pensions has usually seemed most supine
and degenerate to business executives who would be unattracted by
companies in which they were subject to arbitrary discharge or which
lacked adequate pension arrangements. Farmers have been regularly
reproached for their lack of fealty to the free price system by entre-
preneurs whose own prices have not been changed for some years.

In the conventional wisdom of conservatives, the modem search
for security is regularly billed as the greatest single threat to economic
progress. These fears have been strongest at a time when great ad-
vances in social security were coinciding with great economic pro-
gress. Among liberals the prospect for finding new forms of social
protection with wide appeal to the masses remains the highest hope
both for social progress and for political preferment. When liberals
in the United States deplore, as they regularly do, their lack of new
ideas, they have reference, almost invariably, to the lack of new and
pohticaUy attractive forms of social security. Tliis is disconcerting to
conservatives who also suppose that an endless number of new ideas
for protecting the individual from economic misfortune are lurking
just around the comer. Yet in fact there have been few really new
proposals for many years.

II

The first step in penetrating this bedlam is to recognize that while
risk was indeed inherent in the economic society of die central tradi-
tion, it has long been regarded with equanimity by almost no one.
And all who were subject to insecurity sooner or later set about
eliminating it as it adccted themselves. In large measure they were
successful. The devices by which they did so have varied much. This
has led those who were using one device to sec it as a necessary pre-
caution while they deplored the iniquitous measures devised by
others. And, as will by now be scarcely surprising, while insecurity
was eliminated in the real world, it survived more or less intact in the
ideological imderpinning of the conventional wisdom and continued
therein to play its all but indispensable role.

The elimination of economic insecurity was pioneered by the

ECONOMIC SECURITY

79

business firm in respect of its own operations. The greatest source of
insecurity, as noted, lay in competition and the free and unpredictable
movement of competitive market prices. From the very beginning
of modem capitalist society, businessmen have addressed themselves
to the elimination or the mitigation of this source of inseairity.
Monopoly or the full control of supply, and hence of price, by a
single firm was the ultimate security. But there were many very
habitable halfway houses. Price and production agreements or cartels,
price-fixing by law, restrictions on entry of new firms, protection by
tariffs or quotas, and many other devices have all had the effect of
mitigating the insecurity inherent in the competitive economy. Most
important, where the number of firms is small, a characteristic fea-
ture of the modem industry, interdependence, is recognized and re-
spected, and firms stoutly avoid price behaviour whicli would
enhance uncertainty for all.

These efforts have been long and widely remarked. However, the
tendency of tlicsc measures to focus directly or indireedy on price,
which, as stated, is the greatest somce of uncertainty, has led econo-
mists to regard the management of prices as being of unique impor-
tance. And they have far more fi*equaitly related such management
to the maximization of profits than to the minimization of risks. The
spectre that has haunted the economist has been the monopoly seek-
ing extortionate gains at die public expense. This has dominated his
thoughts. The less dramatic figure, the businessman seeking protec-
tion from the vicissitudes of the competitive economy, has been
much less in his mind. That is unfortunate, for die development of
the modem business enterprise can be understood only as a compre-
hensive effort to reduce risk. It is not going too &r to say that it can
be understood in no other terms.

Specifically, it fidls within the power of the modem large corpora-
tion to mitigate or eliminate (with one exception) every important
risk to whidi business enterprises have andendy been subject. Con-
sumer taste and demand may shift. The modem large corporation
protects itself by its advertising. Consumer taste is thereby brought
at least partly under its control. Size makes possible a diversified Ihie.
This provides further protection. There is danger that technological
change will render obsolete a product or method of production. The

8o

THB AFFLUENT SOCIETY

modem corporation is able, through its research and technological
resources, to ensure that it vnll be abreast of such change. Therefore
technological change will occur imder its own auspices or within its
reach. A measme of control over prices means a measure of control
over earnings. This means at least partial independence of the capital
market for funds. Ske, moreover, greatly diversifies the opportunities
of the firm in raising money. In the large organization even die risks
associated with the selection of leadership are reduced. Organization
replaces individual authority; no individual is powerful enough to do
much damage. Were it otherwise, the stock market would pay close
attention to retirements, deaths, and replacements in the executive
ranks of the large corporations. In fact, it ignores such details in tacit
recognition that the organization is independent of any individual.*

The massive reduction in risk that is inherent in the development
of the modem corporation has been fir from fully appreciated. Tliis
is pardy because the corporation, unlike the worker, farmer, or other
individual citizen, has been able to reduce its insecurity without
overdy seeking the assistance of government. It has required ela-
borate organization, but this has been the product of continuous
evolution from the original entrepreneurial enterprise. Farmers,
workers, and other dtizms, by contrast, have had to seek the assis-
tance of government or (as in the case of the unions) they have had to
organize specially for the purpose of reducing insecurity. Conse-
quendy their search for greater seciuity has been notorious. By con-
trast the corporate executive, whose concern pioneered the escape
j&om insecurity, has been able to suppose that security is something
with which only workers or krmers are preoccupied.

Myth has also played a part in concealing the efibrt of the modem
corporation to minimize insecurity. There is a remarkable convic-
tion, even on the part of the executives of the largest business corpora-
tions, that they live dangerously. As diis is written, no large United
States corporation, which is aho large in its industry, has filled or
been seriously in danger of insolvency in many years. The security of
tenure of corporation executives is remarkably high. So is their
remuneration. Certainly these bear no resemblance to the insecurity

* Tliese are matters which I hope to treat in much greater detail in a forthcomii^
book on the corporation and the corporate personality.

ECONOMIC SECURITY

8l

of the fortunes of the business entrepreneur of the competitive model.
Individual decisions of corporate management may still turn out to
have been wrong. But in the large, diversified corporation— in con-
trast widi the small and more specialized firm— such decisions are
rarely fatal.

The riskiness of modem corporate life is in fact the harmless con-
ceit of the modem corporate executive, and it is vigorously pro-
claimed. Precisely because he lives an orderly and careful life the
executive is moved to identify himself with the dashing entrepreneur
of economic literature. For much the same reason, the co mm ander

of an armoured division, travelling in a trailer and concerning him-
self with petrol supplies, sees himself as leading an old-time cavalry
charge. Nothing has been more central to the purpose of General
Motors or General Electric than to encompass and eliminate the
perils to which the one-time entrepreneur was presumed to be sub-
ject. Nothing would be more damaging to an ^ecutive reputation in
General Motors or General Electric than to laimcli a product without
testing the market, to be caught napping by a technological develop-
ment, to be unprotected on one’s raw-material supply or to be caught
in a foolish price war. These were once the commonplace risks of
entrepreneurship.

But the large corporation has been only the leader in the retreat
firom risk. Nearly everyone else has participated to the best of his
ability and ingenuity, and in the thirties there was an especially wide-
spread efibrt to mitigate the economic perils of the average man. The
federal government intervened fi>r tlic first time with relief and
welfare funds to protect the individual from economic misfortune.
This was followed by social security— unemploymait insurance and
old age and survivor’s pensions. Farmers, through public payments
and support prices, were protected fix)m some of the insecurity
associated wi^ competitive market prices. The unions developed
rapidly during this decade. Along with their redress of bargaining
power, diey provided the worker with protection against capricious
or adventitious firing or demotion and thus increased his security in
his job. Even the smaller businessman, through the Robinson-
Patman Act, the Fair Trade laws, legislation against bclow-cost
selling, and dirough trade associations, won a measure of security

82

THE AFFLUENT SOCIETY

from the uncertainties of market competition for which he shared
tlie universal distaste.

The foregoing measures were micro-cconomic. They protected
the individual, firm, or group from the specific adversities to which
it was subject. But the effective mitigation of insecurity required
another and parallel effort of a far more general sort. The position of
the worker who is protected against arbitrary firing by a sound
seniority system is far from ideal if he receives an entirely non-dis-
criminatory discliarge as die result of an insufficiency of demand for
the product he is making. This is especially so if a general shortage of
demand keeps liim from finding a job elsewhere. While unemploy-
ment compensation is better than nothing, a job is better than either.
Even with an effective enforcement of the laws preventing price
discrimination— roughly the use by a large firm of its size to exact
and offer prices which small competitors cannot obtain or quote—
the competitive position of the small retailer in a time of depression
is not happy. Regardless of die conditions of competition, it is much
better when the demand for everyone’s product is good. Farm sup-
port prices are a useful protection against sudden adverse price move-
ments. But a demand for farm products that holds such prices reliably
above support levels will be preferred by every rational farmer.

At a time, as during the thirties, when there was great interest in
the micro-cconomic measures to increase security, it would have
been surprising indeed had there been no macro-economic effort
with its greater efficiency to the same end. The two efforts would be
in the highest degree complementary. In fact, the reduction of
insecurity by macro-economic measures was central in the economic
policy of the time. Efforts to eliminate or mitigate the business cycle
and to stabilize the economy at a level where the labour force would
be more or less fully employed were a principal goal of public policy.
Then, as since, economic stabilization was regarded as an end in itself,
but it will now be dear that it was only one part of the broad effort
to escape the insecurity which was assumed to be inherent in econo-
mic lifo. The change in attitudes on macro-economic security during
the thirties was remarkable. At the beginning of the decade it was
almost uniformly assumed that cyclical fluctuations with accompany-
ing price and employmoat uncertainties were inevitable. It was hoped

BCONOMIC SECURITY

83

by many that they would not be violent. But there was no general
confidence that depressions could be tempered by government action
without the risk either of eliminating the self-corrective features of
the cycle or simply making things worse. By the end of the decade,
under the combined influence of Keynes and the sanguine and experi-
mental mood generated by the New Deal, there was a widespread
belief that dq>ressions could be at least partially prevented. The
notion that they must be allowed to run their course was virtually
extinct.

Ill

These measures to enhance security in the thirties, the micro-econo-
mic and the macro-economic together, were numerous and massive
in their effect, and diey were concen trated in die brief span of a few
years. (While it is convenient to speak of a decade, most of the drive
for increased economic security occurred in the five years from 1933
to 193 8.) Conservatives and liberals alike looked at the measures, and
at the mass approval they evoked, and concluded that something new
and different had been added in economic motivation. Conservatives
struggling, however unconsciously, to reconcile this drive for secur-
ity with die inherent and seemingly indispensable insecurity of the
competitive society were profoundly alarmed. For perhaps the first
time in history they worried not about the turbulent ambitions of the
masses but about their yearning for peace and contentment. Liberals,
observing the poHtical magic in this desire for security, accepted it
and rationalized it. Modem industrial fife, they concluded, was a
thing of exceptional hazard; the worker lived in constant danger of
being tom to pieces by the increasingly complex social machine
which he served Given this image, it was possible to argue that he
needed much more elaborate protection than in the simpler econo-
mic society assumed by earlier economists. These economists could
not have foreseen the risks of advanced industrial capitalism. With
furdier advance ever more protection would be required.

We are now able to see tihe matter in a clearer light. In the thirties
the average man was simply showing the commonplace reaction to
the insecurity of the competitive system. In doing so he was follow-
ing a path that had been pioneered by the modem business firm. He

THE AFFLUENT SOCIETY

84

was showing, as ever, that insecurity is something that is cherished
only for others.

It was inevitable that Airmen and workers in general would be the
last to concern themselves with security. Before a man will try to
protect himself Grom sudden changes in his economic fortune, he
must have some fortune to protect. Businessmen were first to develop
a stake in economic society. They were first, as a result to become
concerned with means, expHcit or unrecognried, for safeguarding
that stake. In the grim world of Ricardo and Malthus the ordinary
citizen could have no interest in social security in the modem sense.
If a man’s wage is barely sufficient for existence, he docs not worry
much about the greater suffering of unemployment. Life is a heavy
burden in cither case. Men who are engaged in a daily struggle for
survival do not think of old age, for they do not expect to see it.
When the nomial expectation of life is very low, sickness and death
are normal hazards. A man of eighty does not take out life insurance.
He reconciles himself as best he can to the prospect of death. To the
landless worker in an Indian village, one of the world’s most luifor-
tunate individuals, unemployment is not even a misfortune. It is his
normal fortune.

With increasing well-being all people become aware, sooner or
later, that they have something to protect. In the very early stages of
the evolution of a business concern, the entrepreneur is not much
concerned with security. He has little equity to conserve. Only later
do he or his descendants begm to talk about their responsibiUties to
their stockholders. Henry Ford could gamble on the untested idea of
producing in a single model the cheapest possible car for the people.
It was a breath-taking step. His colleagues discouraged him, but he
had nothing much to lose. His grandsons would indeed be derelict
were they similarly to risk the present assets of the Ford Motor Com-
pany. No criticism attaches to the effort of the modem corporation
to minimize risk. It would be delinquent in its responsibilities if it
failed to do so. It would be gambling where it could be sure.

The development in the labour market is similar. As the real wage
of the worker increases and also as employment becomes more cer-
tain, unemployment and the absence of income acquires its contrast-
ing horror. With increasing income it also becomes possible to think

ECONOMIC SECURITY *5

of old age: the individual expects to survive, and old age without
income is differentiated, as it was not before, by the prospect of dis-
comfort. And as health and physical hazard decline, men come to
think of them as abnormal rather than normal afflictions. It is not the
poor but the well-to-do farmers who find onerous the iinrprrai'nfi>
of the market, hi the mountain country of Kentucky and Tennessee
a depression is not a grievous hazard. Farmers have htde to sell; their
property has small value. They are therefore little affected by declin-
ing prices and not mucli concerned about declining property values.

In the well-to-do regions things are different. In the nineteen-thirties
it was the comparatively rich farmers of Iowa who threatened the
judges who presided over foreclosure proceedings. From these farms
came the demands for farm relief. Unlike those of the Appa la chian
plateau, these farmers had something to lose.

Thus the notion, so sanctified by the conventional wisdom, that
the modem concern for security is the reaction to the peculiar
hazards of modem economic life could scarcely be more in error.
Rather it is the result of improving fortune— of moving from a
world where people had little to one where they had much more to
protect. In the fint world misfortune and suffering were endemic and
unavoidable. In the second they have become episodic and avoid-
able. And as they became episodic and avoidable, reasonable men
saw the merit of measures to avoid them and the possibilities for
so doing.

Increased economic well-being was not the sole cause of the in-
creased interest in economic security. Allowances must be made for
diffrrences in national temperament and political development. These
may well explain why a comprehmsive system of social insurance
first appeared in Imperial Germany and why, in the non-Communist
lands, it has had its greatest development in Scandinavia and the
United Kingdom. The Great Depression which struck with especial
severity in the United States and Canada greatly quickened the inter-
est in economic security in these countries.

The Great Depression has, in fact, often been dted as evidence of
the growing insecurity of modem industrial life. There was, it is
said, no comparable hazard before the Industrial Revolution. This, it
will now be clear, is a superficial view. The Great D^ression was

86

THE AFFLUENT SOCIETY

severe partly because there was so much wealth and income to lose.
The hazard was greatest in the United States and Canada where the
per capita wealth was greatest. And the depression stimulated concern
for economic security in precisely the same way that a conflagration
stimulates an interest in fire insurance and a flood in flood control.
These also have an effect on individuals which is roughly proportion-
ate to the amount of their property diat lies in the path of the flames
or the water.

IV

Men of property— the Forsytes of the world— have always known
that it is as important to safeguard their wealth as to increase it. But
they have never equated the two. Property can be increased without
hmit; the efforts to safeguard it are subject to sharply diminishing
returns. Having insured against £re, theft, and high winds, a man has
removed the major hazards to his possessions. Protection against
eardiquakes and falling aeroplanes may also be worth while, but it is
not of equal urgency and it does not bring an equivalent increase in
peace of mind.

The problem of economic security is much the same. There are
more serious hazards and less serious ones; as the more serious are
covered there will be a decHning sense of urgency about the less
serious ones and indeed, also, about the entire problem of economic
security. For the worker, in the past, the greatest hazard was the loss
of his job and income. Thereafter, the uncertainties of old age, sick-
ness, accident, and death may well have ranked next in importance.
As and when these risks were mitigated, although others remained,
none was of comparable importance. For die firmer protection
against a severe decline in his prices was (and remains) ofparamoimt
urgency. Such a decline threatens both his income and his assets.
After that, depending on the region, come the dangers of drought
and crop fiilure. There are no other hazards of similar importance.
For the businessman the situation is much the same. The overwhelm-
ing uncertainty concerns product prices and markets. This accounts
for the attention it has received from economists, indeed why, in the
theory of market behaviour, efforts to remove this d i mens ion of risk
have been regarded as more or less unique and also, not infirequendy.

ECONOMIC SECURITY

87

as uniquely reprehensible. There are further hazards— those of cost
movements, raw material supplies, labour relations— which it is
desirable to eliminate, but their potential for damage is less devastat-
ing. Other soittces of uncertainty are of still less importance.

The meaning of this is that elimination of insecurity in economic
hfe can be a finished business. Nothing is more completely accepted
in the conventional wisdom than the chchc that economic life is end-
lessly and inherently uncertain. In fact, the major uncertainties of
pristine economic life (subject to a major qualification concerning the
control of depressions) have already been ehminated. The ones that
remain are of much reduced urgency.

The corollary is that parties and governments cannot, as the con-
ventional wisdom so devoutly assumes, go on ‘inventing’ new kinds
of security. This would be possible were it merely a matter of inven-
tion or were the hazards of modem economic life increasing. But die
hazards are finite in number; they increase only in die sense that
people have more to lose. This is not to say that no economic insecur-
ity remains. For the average individual in the United States sickness
—which may mean large expenditures at a time when there is no
income— is a considerable hazard. Smaller business and agriculture
are still economically insecure vocations. None the less, subject
always to the major qualification that depressions arc to be prevented,
the preoccupation with economic security is largely in the past. No
hazards remain that are comparable in importance with those diat
have been covered. And protection once achieved is quickly taken for
granted. It ceases to be a matter for discussion or even of thought.
Henceforth, in pursuing the goal of greater economic security, we
will be completing and perfecting a structure that in all its major
features now exists.

One cannot stress too strongly, however, dut if economic security
is to be considered finished business, or largely finished business,
depressions, or even any serious failure to provide full employment,
must be prevented. A depression could always break down the
micro-measures that have so laboriously been erected by (or for)
businessmen, worken, fermers, and other citizens for their protec-
tion. Business arrangements for modifying and controlling com-
petition in the interests of market stability then turn into cut-throat

88

THE AFFLUENT SOCIETY

competition. Unemployment insurance becomes not a transitional
protection for the worker who is changing jobs, but an inadequate
livelihood. Farm price supports become low maximum rather than
high minimum prices. The prevention of depressions remains the
sine qua non for economic security.

V

The desire for economic security was long considered the great
enemy of increased production. This attitude was firmly grounded
in the belief that the insecurity of the competitive model was essen-
tial for efficiency. Along with the carrot of pecuniary reward must go
the stick of personal economic disaster. Both were essential. To re-
move the stick, which must be the consequence of increasing econo-
mic security, would be to remove half the incentives by which men
were inspired. This belief still has a considerable role in the conven-
tional wisdom. The efforts of farmers to minimize uncertainty,
although in many respects far less effective than those of larger cor-
porations or trade unions, have inspired especial alarm. In tlie recent
view of a leading agricultural economist, ‘When millions of able
[farm] entrepreneurs have regained die self-confidence to operate
without the social harness of bureaucratic guidance and universal
risk insurance, it is an event that may amount to a decisive victory in
the free, anti-collective world. But even in modem corporate life,
the conventional wisdom gives great credit to the threat of adversity.
‘The characteristic of European businessmen as a class as distin-
guished from Americans is their complacency, their timidity, and
their instinctive looking to each other and to government for pro-
tection against the rude shocks of the contemporary world. And the
thing they fear most is price competition.**

^ Karl Brandt, * Agricultural Price Policy During Rearmament’, /ounia/ of Farm
Economics, vol. XXXIV (May 1952), p. 198. Professor Brandt is a past president of
the American Farm Economic Association.

* Randall, A Creed for Free Enterprise, p. 23. Mr. Randall vm for many years an
executive and after 1949 the very articulate president of the Inland Steel Company.
In the steel industry overt price competition is virtually unknoivn, the elimination
of this source of insecurity having been accomplished many years ago. But in the
liturgy of the conventional vdsdom the piaisei of price competition are still

ECONOMIC SECUSITY

89

Plainly, however, the notion diat economic inseciuity is essential
for efficiency and economic advance was a major miscalculation—
perhaps the greatest in the history of economic ideas. (It was the
common miscalculation of both Marxian and orthodox economists.
Marx and his followers were deeply persuaded that capitalism would
be crippled by efforts to civilize it. To cite one obvious example,
luiemployment compensation would ruin the operation of the indus-
trial reserve army in regulating wages.) In fact the years of increasing
concern for economic security have been ones of imparalleled ad-
vance in productivity. Those spokesmen who have been most
alarmed over the debilitating effects of the search for security have
often remarked most breathlessly on the improvements in produc-
tivity wliich have occurred at the same time. The economist whose
views were just cited on the alarming dangers of ‘universal risk
insurance’ in agriculture characteristically observed in die same paper
diat, ‘During die last few decades, breath-taking technological evo-
lution has been opening new frontiers in agriculture, and die pro-
gress has been most spectacular in the United States and Canada.
Not only did it assist gready in World War II, but it also kept mil-
lions of people in Europe and Asia alive. . . Part of this techno-
logical advance in agriculture may have been the result of price
support legislation which reduced price and income imcertainty.
Farmers were thus able to invest in new technology with increased
confidence. But this notably plausible possibility has no standing
in the conventional wisdom. Hence it is forthrighdy ignored.

The data on what has happened to output in the age of security
could scarcely be more impressive. In the twenty years prior to the
nineteen-thirties, the decade when the concern for security first be-
came a source of uneasiness, labour productivity— nation^ income
produced per man-hour— increased from 89*6 cents in 1900 to 1 13 *3
cents in 1929. This was a total of 23 *7 cents or at a rate of about i *2
cents a year. In the ten years following the thirties the total increase
was firom 131 *5 cents to I79’2 cents or by 47*7 cents. This was by an
average of 4*8 cents a year or four times the amount of the earlier

vigoroudy sung. As a result, it is strongly recommended even by those who have
most successfully diminated it

1 Brandt, ‘i^^ricultuial Price Policy Dutii^ Rearmament’, pp. 185-6.

90

THE AFFLUENT SOCIETY

period. The increases continued in the decade of the fifties. Plainly
the increased concern for security, so fiir fiom being in conflict with
increased productivity, was consistent with a greatly accelerated rate
of advance.^ The most impressive increases in output in the history
of both the United States and other western countries have occurred
since men began to concern themselves with reducing the risks of the
competitive system.

It must be repeated that in the conventional wisdom such empirical
evidence is not necessarily decisive. The consequences truly depicted
by the convoitional wisdom arc, it is held, lurking just out of sight.
To respect the evidence is only to evince an imsubtle mind. Yet in
this instance the reality is somewhat difficult to evade. Hie increase in
economic security and the increase in economic product are accom-
plished facts. The conflict between security and progress, once billed
as the social conflict of the century, doesn’t exist.

VI

Not only is there no inconsistency between die mitigation of in-
security and the increase of production, but the two are indissolubly
linked. A high level of economic security is essential for maximum
production. And a high level of production is indispensable for eco-
nomic security. So compulsive, indeed, is the pressure to maintain
output as a requisite of economic security that the economy is im-
pelled to a level of performance which, as things now stand, it can
sustain only with difliculty and at some cost and danger. But this is
running ahead of the story. We must press a step further the relation
fint of economic security to production and dien the reciprocal rela-
tion of production to economic security.

The major threat to production in our day is not, as the more
nostalgic exponents of the conventional wisdom still so fondly ima-
gine, the lazy and malingering workman or the imenterprising boss.
These wastrels unquestionably exist. Payments designed to bridge
periods of involuntary unemployment do provide modestly for some

^ Estimates are in 1950 prices. Hiey are from America’s Needs and Resources,
A New Survey, by J. Frederic Dewhurst and Associates (New York, Twentieth
Century Fund, 1955), p. 40.

BCONOMIC SBCUKITY

91

wholly voluntary idleness in Plorida. We have feather-bedding
unions and gold-bricking workmen and slodifiil supernumeraries
everywhere. Indeed it is possible that die ancient art of evading work
has been carried in our time to its highest level of sophistication, not
to say elegance. One should not suppose that it is an accomplish-
mait of any particular dass, occupation, or profession. Apart firom
the universities where its practice has the standing of a scholarly rite,
the art of genteel and elaborately concealed idleness may well reach
its highest development in die upper executive reaches of die modem
corporation.

What is certain, however, is that the loss of production from this
conventional and cherished shirking is small as compared with what
can be lost firom the involuntary idleness of workers and the £a more
ruthless fhistratiou of entrepreneurial initiative as the result of depres-
sion. For the same reason the potential gain in production firom
eliminating such involuntary idleness, and firom widening entre-
preneurial opportunity by expanding markets, is far greater than
anything that could be hoped for firom the most sweeping streng-
thening of individual incentives resulting in the most radical in-
crease in the willingness of individuals to work or expend executive
mergy.

Between 1929 and 1932 the Gross National Product, roughly the
total production of the nation, expressed in constant (1950) dollars,
dropped by ¥44 thousand million firom $157*8 to $113*6 thousand
million. No diminution in the energy or initiative of workmen or
their employers could have an efirct comparable with this massive
increase in forced idleness by individuals who would have much pre-
ferred to work. (Between 1929 and 1932 unemployment increased
firom 1*55 million to 12*1 million; non-agricidtural employment
decreased firom 35*1 million to 28*8 million.^) This was a demonstra-
tion of hbtoric magnitude of the inefficioicy of depression. But there
have been more modest if still striking demonstrations in more recent
times. In late 1953 and 1954 there was a mild depression and in the
latter year output was sliglitly below the previous year. ($360*5
thousand million as compared with $364*5 thousand million. Prices

^ Eemomk htdkators. Historical and Descriptive Supplement, 1935. Joint Com-
mittee on the Economic Report.

THB AFFLUENT SOCIETY

92

were the same.) Unemploymeat increasedl from 1*6 million in 1953
to 3*2 million in 1954. If instead of this slight decline there had been
the commonplace increase of immediately preceding years, and
which the labour force could have sustained, production would have
been about $20 thousand million greater. That was equal to nearly
a diird of the aurent outlays of the federal government and ap-
proached the total of all state and local outlays. This production was
not missed and, indeed, its loss was little remarked. We shall see later
that there were very good reasons for such equanimity— the goods
so sacrificed were not, in fact, of high urgency. But die figures do
show the ineflSciency of even the mildest depression.

The immediate although not the ultimate cause of depression is a
fiill in the aggregate demand— meaning in the purchasing power
available and being used— for buying the output of the economy.
Unemployment insurance means that a man’s purchasing power is
protected when he loses his job. It falls, but no longer to zero. Thus
a measure deseed to reduce die insecurity associated with unem-
ployment also acts to counteract the loss of output— the economic
ine£Bciency— associated with depression. And, to the confusion of the
conventional wisdom, it acts on a central cause of inefficiency, one
that is far more important than isolated malingering which unem-
ployment insurance might conceivably have encouraged.

This e&ct, of course, is not peculiar to unemployment insurance.
Farm support prices, which force compensatory public outlays when
farm prices, income, and purchasing power &11, have the same effect.
So do public welfare payments. Old age and survivor’s insurance
insure a modest but steady flow of purchasing power firom those who
are no longer able to work. This flow is unaffected by an ebb in
«:ononiic activity and thus acts as a stabilizing influence. In the
aggregate these measures to minimize insecurity comprise a con-
siderable part of what economists have come to call ^e ‘built-in
stabilizers’ of the economy. Thus measures thought by the conven-
tional wisdom to be hostile to productivity all support it at the most
crucial point.

But the reciprocal effect is equally dear and the pressures back of
it are much more demanding. As noted above, a high levd of pro-
duction is essential for the economic security of wotkers, farmers.

ECONOMIC SBCUSITY

93

and businessmen. With it there is a tolerable level of security for all.
Without a high level of output, the micro-economic measures, in
their present form at least, are only a second best. Moreover, although
it has been a point in favour of unemployment compensation, old age
pensions, and other measures for micro-economic security that they
enhance economic stability, this has never been their central purpose.
They have been centrally designed with the individual recipient in
mind.

By contrast, to a very large degree in recent times increased output
has been sought not for the goods involved but for the cdect on
economic security. Whether we need or even wish the goods that are
produced, their assured production means assured income for those
who produce them. This serves the goal of economic security.
Nothing else serves it so well. To ialter on production, even though
that production serves the most unimportant of requirements, is to
expose some individuals somewhere to loss of employment and in-
come. This cannot be allowed.

The fiicts here are a nutter of common observation. In the political
life of western countries— the United States, the United Kingdom,
and the older British Commonwealths— nothing counts so heavily
i^ainst a government as allowing unnecessary unemployment. It is
not the lost production that is mentioned. It is always the imemploy-
ment. The remedy is, of course, more employment and higher pro-
duction. Thus the effort to oihance economic security becomes the
driving force behind production.

The reader scarcely needs to be reminded of the point at which this
essay has arrived. The ancient preoccupations of economic life— with
equality, security, and productivity— have now narrowed down to a
preoccupation with productivity and production. Production has
become the solvent of the tensions once associated with inequality,
and it has become the indispensable remedy for the discomforts,
anxieties, and privations associated with economic insecurity. Here
we have the explanation, or more precisely the beginning of the
e3q>lanation, of a modem paradox: Why it is that as production has
increased in modem times concern &r production seems also to have
increased. Production has become the centre of a concern that had
hithorto been shared with equality and security. For these reasons,

THE AFFLUENT SOCIETY

94

and supported, we shall see, by an elaborately synthetic rein&rce-
ment, it has managed at least superficially to retain the prestige which
inevitably it had in the poor world of Ricardo. The nature of the
present preoccupation with production, and the devices by which
this preoccupation is sustained, are the next order of business.

CHAPTER NINE

»

The Paramount Position of Production

In the autumn of 1954, during the Congressional elections of that
year, the Republicans replied to Democratic attacks on their steward-
ship by arguing that this was the second best year in history. It was
not, in all respects, a happy defence. Many promptly said that second
best was not good enough— certainly not for Americans. But no
person in either party showed the slightest disposition to challenge
the standard by whi^ it is decided that one year is better dian an-
other. Nor was it felt that any explanation was required. No one
would be so eccentric as to suppose that second best meant second
best in the progress of the arts and the sciences. No one would
assume that it referred to health, education, or the battle against
juvenile delinquoicy. There was no suggestion that a better or poorer
year was one in which the chances for survival amidst the radioactive
fomiture of the world had increased or diminished. Despite a marked
and somewhat ostensible preoccupation with religious observances at
the time, no one was moved to suppose that 1954 was the second best
year as measured by the number of people who had found enduring
spiritual solace.

Second best could mean only one thing— that the production of
goods was the second highest in history. There had been a year in
which production was higher and which hence was better. In fact in
1954 the Gross National Product was $360*5 thousand million; the
year before it had been $364*5. This measure of achievement was
acceptable to all. It is a relief on occasion to find a conclusion that is
above foction, indeed above debate. On the importance of produo*
tion there is no difierence between Republicans and Democrats.

95

THB AFFLUENT SOCIETY

96

right and left, white or coloured, CathoUc or Protestant. It is com-
mon ground for the general secretary of the Communist Party, the
Chairman of Americans for Democratic Action, the President of
die United States Chamber of Commerce, and the President of
the National Association of Manufacturers.

We are, to be sure, regularly told that production is not every-
thing. We set no small store by reminders that there is a spiritual side
to hfe; those that remind are assured a respectful hearing. But it is
significant that these are always reminders; they bring to mind what
is usually forgotten. No one doubts that in the general coune of Hfe
one must be sensible and practical. It is an index of the prestige of
production in our national attitudes that it is identified with the
sensible and the practical. And no greater compHment can be paid to
the forthright intelligence of any businessman than to say that he
understands production. Scientists are not without prestige in our
day, but to be really useful we still assume that they should be imder
the direction of a production man. ‘Any device or regulation which
interferes, or can be conceived as interfering, with [the] supply of
more and better things is resisted with unreasoning horror, as the
rehgious resist blasphemy, or the warlike pacifism.’^

The importance of production transcends our boundaries. We are
regularly told— in the conventional wisdom it is the most firequent
justification of our civilization, even our existence— that the Ameri-
can standard of Hving is ‘the marvel of the world’. To a very con-
siderable extent it is.

II

As Tawney observed, we are rarely conscious of the quality of the air
we breathe. But in Los Angeles, where it is barely sufRdent for its
fireight, we take it seriously. Similarly those who reside on a recently
reclaimed desert see in the water in the canals die evidence of their
unnatural triumph over nature. And the Chicagoan in Sarasota sees
in his tanned belly the proof of his intelligence in escaping his dark
and frozen habitat. But where sun and rain are abundant, though they
are no less important, they are taken for granted. In the world of
Ricardo goods were scarce. They were also closely related, if not to

^ Geoffrey Gorer, The Americans (London, Cresiet Press, 1948), p. 121.

THE PARAMOUNT POSITION OF PRODUCTION 97

the survival, at least to the elemental comforts of man. They fed him,
covered him when he was out of doors, and kept him warm when he
was within. It is not surprising that the production by which these
goods were obtained was central to men’s thoughts.

Now goods are abundant. More die in the United States of too
much food than of too httle. Where the population was once thought
to press on the food supply, now the food supply presses relentlessly
on the population. No one can seriously suggest that the steel which
comprises die extra four or five feet of purely decorative distance on
our cars is of prime urgency. For many women and some men cloth-
ing has ceased to be related to protection from exposure and has
become, like plumage, almost exclusively erotic. Yet production
remains central to our thoughts. There is no tendency to take it, like
sun and water, for granted; on the contrary, it continues to measure
the quality and progress of our civilization.

Our preoccupation with production is, in fact, the culminating
consequence of powerful historical and psychological forces— forces
which only by an act of will we can hope to escape. Productivity, as
we have seen, has enabled us to avoid or finesse die tensions anciendy
associated with inequality and its inconvenient remedies. It has be-
come central to our strivings to reduce insecurity. And as we shall
observe in the next chapters its importance is buttressed by a higlily
dubious but widely accepted psychology of want; by an equally
dubious but equally accepted interpretation of national interest; and
by powerful vested interest. So all-embracing, indeed, is our sense of
die importance of production as a goal that the first reaction to any
questioning of this attitude wiU be, * What else is there? ’ So large does
production bulk in our thoughts that we can only suppose that a
vacuum must remain if it should be relegated to a smaller role.
Happily, as we shall see in the concluding chapters, there are other
things. But first we must examine more closely our present pre-
occupation with production. For nothing better suggests the extent
to which it is founded on tradition and social myth than the highly
stylized attitudes with which we approach it and, in particular, die
traditional and highly irrational emphasis we accord to the different
methods of expanding economic product.

E

98

THB AFFLUENT SOCIETY

III

Production— the output of the economic system— can, in principle,
be increased in five ^fierent ways. These are wordi listing formally
and are as follows:

(1) The productive resources that are available, in particular the
labour and capital (including available raw materials), can be
more fully employed. In other words, idleness can be eliminated.

(2) Given the technical state of the arts, these resources can be more
efficiently employed. Labour and capital can be used in the most
advantageous combination, one with the other, and the two can
be distributed to the greatest advantage, consumer tastes con-
sidered, between the production of various things and the render-
ing of various services.

(3) The supply of labour can be increased.

(4) The supply of capital, which also serves as a substitute for labour,
can be increased.

(5) The state of the arts can be improved by technological iimovation.
As a result more output can be obtained firom a given supply of
labour and capital and the capital will be of better quality.

On purely a priori grounds there is no reason for supposing that
any one of these methods of increasing production is more efi^tive
than any other.^ A serious effort to increase ou^ut would emphasize
all five. Yet it is the truly remarkable foct that we concern ourselves
seriously with only one of these methods of increasing output and
give, at the very most, only passing attention to another two or three.

^ In die period between 1869-73 and 1944-53 net national output increased at an
average annual rate of 3*5 per cent of which about half (1*7 per cent) can be
attributed to the increase in capital and labour supply. The remainder can reason-
ably be imputed to teduiological improvement in capital and the parallel improve-
ment in the people who devise the better capital equipment and operate it hi
recent times a growing share of the increase is attributable to such technological
advance and a declining share to mete increases in capital and labour supply.
C£ Moses Abramovitz, Resources and Output Trends in the United States Since 1870,
and John W. Kendrick, Productivity Trends: Capital and Labor, Occasional papers
5a and 53 of die National Bureau of Economic Research, New York, 1956.

THB PASAMOUNT POSITION OF PRODUCTION 99

Thus even in the conventional wisdom no one questions the im-
portance of technological advance for increasing the production (and
also multiplying the products) from the available resources. These
gains are regularly viewed with great and even extravagant pride.
Improvements in technology do not come by accident. They are the
result of investment in highly organized scientific and engineering
knowledge and skills. Yet we do very little to increase the volume of
this investment, except perhaps where some objective of military
urgency is involved. Rather we accept whatever investment is
curroidy being made and applaud the outcome.

The investment almost certainly could be much greater and fsa
more rational. Even on the most superficial view, the scientific and
engineering resources by which modem technology is advanced are
most unevenly distributed between industries. In industries where
firms are few and comparatively large— oil, metallurgy, cars, chemi-
cals, rubber, heavy engineering— the investmmt in technological
advance is considerable. The research and developmental work on
which this advance depends is well financed and comprehensive. But
in many indtistiies where the firms are numerous and small— coal-
mining, home construction, clothing manufiicture, the natural-fibre
textile industry, the sovice industries— the investment in innovation
is negligible. No firm is large enough to a£R)rd it on an appreciable
scale; there is real question as to whether it is worth while for such
firms.^ Unlike agriculture, where innovation is cxtmsively supported
by the federal and state governments, there is little or no publicly
financed research and development. Yet the absence of investment in
innovation in these industries, much though we value its fruits in
other industries in which it occun, excites not the slightest attention.
We attach profound importance to the fret that some industries
advance. We attach almost no importance to the fact that others
do not.

It is easy to overlook the absence of appreciable advance in an
industry. Inventions that are not nude, like babies that are not bom,
are rarely missed. In the absmee of new developments, old ones may
seem very impressive for quite a long while. Until the combine

* I have discussed this point in some detail in my American CapifaUsm: The
Cancel of Cottnleruailu^ Power, pp. 84-94.

100

THE AFFtUENT SOCIETY

appeared, the self-binder had been the mechanical marvel of the &rm
machinery industry for forty years. But if we were serious about in-
creased output, we would be much more searching in these matters.
Certainly we would regard the absence of investment in innovation
in an industry as intolerable. But in fact large numbers of industries
make Htde or no such investment, have Utde or none made on dieir
behalf, and we are quite untroubled.

IV

In everyday economic discourse nothing is more frequently taken as
an index of economic growth than the volume of capital formation.
This is the product of saving from ciurent consumption and com-
panion investment. As with technological advance, we content our-
selves with whatever volume of capital formation we are getting. An
occasional scholar may observe that we are not investing enough—
possibly that the proportion of current income invested by the
Russians is much greater. We have routine preachments on the
virtues of thrift. But none of this is assumed to call for any practical
action. On the contrary, there is a more general conviction that the
current volume of investment in the American economy is never less
than adequate and is rarely less than remarkable.

As with capital so with the labour force. Once princes and frudal
lords who wished to increase the productive wealth of their domains
imported craftsmen as a matter of course. So frr as there is a single
current limitation on the rate of growth in the Amoican economy,
it is the size of the labour force. (Substitution of capital for labour is
ordinarily possible with slight e£Eect on cost over a considerable range
of output, but some time is required.) The world contains a great
many potential recruits for our labour force. But nothing would be
viewed with more suspicion than this method of esipanding output.
Even to suggest that e£>rts be made to e3q>and the labour force by
increasing the domestic birth-rate would seem slightly artful. The
resistance arises partly from the belief, not wholly justified, that an
increase in population might increase total but not per capita produc-
tion. No nice philosophical point has ever been so decisively resolved
as this: that fiiose who are not conceived do not miss the pleasure of

THE PARAMOUNT POSITION OF PRODUCTION lOI

consuming the goods they do not get bom to enjoy. But whatever
the e£^ of increasing population on standards of living, it is clear
that we are not sufficiently interested in increased ou^ut, or suffi-
ciently rational about the means of gettii^ it, to seek it by increasing
the labour supply.

Even the production that is lost during a depression— and as noted
in the last chapter the loss from even a mild setback can be con-
siderable— though it is the subject of a certain amount of erudite
regret by economists is not a matter of any general concern. The
menace of depressions is not the production that is sacrificed but the
jobs and income that are lost— in short, the threat to economic
seemity.

On the other hand, we do take very seriously loss of production
which is the result of the deUberate holding of labour or capital out of
production or which is the result of any inefficiency in their com-
bination and use. We deplore the malingering workman. We be-
come deeply aroused by the feather-bedding union. A monopoly
leads to a less than optimum employment of labour and capital in a
particular industry and ffierefore a higher than necessary price for the
product. The resources not employed in the monopolized industry
are employed in larger quantity and to less advantage in other indus-
tries, whidi means that their distribution is less than ideal. Consider-
able enthusiasm can be aroused for measures that increase output by
eliminating monopoly. Economists have never been loath to give
their leadership to the efrbrt.^ There is equal antipafiiy to and similar
popular concern about inefiicient use of resources restdting from
tariffi and excessive investment in inherently costly industries; about
subsidies to favoured but inefficient industries or firms; and about the
forms of industrial oi^;anization which lead to heavy advertising or
sales costs or similar seeming waste. Although, curiously, there is no
especial concern about the industry that does no leseardi and makes
little technological progress from one year to the next, nothing

^ Although there have been competent expressions of doubt as to die losses.
Cf in particular ‘Monopoly and Resource AUocation* by Arnold C. Harberger,
American Eamomic Reuiew, Proceedings, voL XUV, no. 2 (May r954), and ‘The
Social Cost of Corporate Monopoly Profits’ by Henry H. Vilhud, Political Science
Quarterly, voL LXXU, no. 3 (Sqxtember 1937).

102

THE AFFLUENT SOCIETY

inspires indignation like a firm which, having made an invention,
holds it out of use.

None of this is specifically to decry concern for monopoly, tariifi,
subsidies, or organized and imrcpcntant idleness. Also, although pro-
ductive efficiency is tlie central, it is not the sole issue where these
matters are concerned. Rather, my purpose is to show how partial
and indeed eccentric is our concern for increased production. Nor are
its roots very difficult to uncover. A hundred years ago in mid-
nineteenth-century Britain, an economist surveying the possibilities
for increasing the production on his islands would have found one
important and two or three much less important things to recom-
mend. Most obviously and most importantly, he could urge that by
attacking monopolies, lowering tariffi, and promoting competition
and the free and luihampered movement of labour and capital the
efficiency with which labour and capital were employed would be
increased. Much less importantly, he could urge that people be
thrifty and save so that the rate of capital formation might be in-
creased. And, of course, he could always urge workers to be diUgent,
and he could condemn anything that might involve restrictions on
their effort or impairment of their incentives.

Few of the modem possibilities for raising production were rele-
vant. In a world that was still imder the shadow of Malthus he could
hardly propose adding more people. There were presumed to be as
many as the food supply could sustain. This was well before the age
of the large industrial corporation. Only with the arrival of the latter
were investment decisions removed from the hands of numerous
independent entrepreneurs, responding individually to market incen-
tives, and made subject to a measure of corporate administration.
And tmtil this happened it was not really possible to think of the rate
of investment and the consequent rate of growth as anything that
might be within range of social interest and decision.

The nineteenth-century scholar could scarcely have been occupied
with the volume of research and development in an industry. This is
a modem phenomenon and also related to the growth of modem
corporate enterprise. In his day invention was a largely adventitious
matter save as it might be encouraged by the patent office. ^The
patent office, appropriately, was taken very seriously.) The loss of

THE PARAMOUNT POSITION OP PRODUCTION IO3

production during depressions was not an issue in a world which
kcked good luiemployment and output statistics and in which
depressions, in any case, were regarded as inevitable.

The lesson will be evident. Our operative concern for increasing
production is confined to the measures— for getting greater resource-
use efficiency and promoting thrift and diligence— which were rele-
vant a century ago. The newer dimensions along which there might
be progress attract our attention scarcely at all. The shortcomings and
opportunities here are undoubtedly great. But they are outside the
formal and stylized concern of the conventional wisdom for the
problem of production.

There is an interesting proof of the point in the increase in produc-
tion which, in the past, we have regularly acliicved during war or
under die threat of war. Under the stress of circumstance the con-
ventional wisdom is rejected. We set about expanding output along
all the relevant dimensions. Serious efforts are made to expand the
labour force. It becomes permissible to import toilers with swarthy
skins who speak unintelligible languages. The drive for increased
saving becomes serious. Where investment is inadequate more is
made. There is no involuntary idleness. As in the case of alloy steels,
synthetic rubber manufiteture, and ship construction in World War
II, technologyis brought purposefully intoplay to permit of expanded
output with available resources. It is at least amusing (though not too
much store should be set by the point) that during both World Wars
the enforcement of the anti-trust laws, the traditional design for
ensuring greater resource-use efficiency, was suspended. Because of a
rational concern for production war has brought an astonishing ex-
pansion in output, and this despite the withdrawals firom the labour
force for military purpose.

Though we have been astonished we should not have been. Our
peacetime concern for production, central though it is to our
thoughts, is selective and traditionaL As a result, at any given time
both our total output and its rate of increase are only a small part of
what it m^t be, perhaps indeed only a minor fiction. Nor would
the necessary measures to expand labour force, expand the rate of
capital formation, and perhaps most important to bring technology
to bear on presently backward industries require any very revolu-

104 thb affluent society

tionary diange in our economic and political system. It would only
require that production have die priority in all public policy which
it now has in the traditional areas of resource use and combination.

There is another respect in which our concern for production is
traditional and irrational. We are curiously unreasonable in the dis-
tinctions we make between different kinds of goods and services.
We view the production of some of the most frivolous goods with
pride. We regard the production of some of the most significant and
civilizing services with regret.

Economists in calculating the total output of the economy— in
arriving at the now familiar Gross National Product— add together
the value of all goods and all services of whatever sort and by whom-
soever produced. No distinction is made between public and pri-
vately produced services. An increased supply of educational services
has a standing in the total not different in kind from an increased out-
put of television receivers. Nothing, however, could be more in
conflict with popular attitudes, and indeed it is rather surprising that
economists have not been reproached by the rather considerable
number of individuals who, if diey fully understood the nature of the
calculation, would regard the inclusion of government spending as
subversive.

In the general view it is privately produced production that is im-
portant, and that nearly alone. This adds to national well-being. Its
increase measures the increase in national wealth. Public services, by
comparison, are an incubus. They are necessary, and they may be
necessary in considerable volume. But they are a burden which must,
in effect, be carried by the private production. If that burden is too
great, private production will stagger and fidl.

At best public services are a necessary evil; at worst they are a
malign tmdency against which an alert commiuiity must exercise
eternal vigilance. Even when they serve the most important ends,
such services are sterile. ‘Government is powerless to create anything
in the sense in which business produces wealth. . .

1 Francis X. Sutton, Seymour £. Harris, Carl Kaysen, and James Tobin, The
American Business Creed (Cambridge, Mass., Harvard Univerity Press, 1956}, p. 195.

THB PARAMOUNT POSITION OF PRODUCTION IO5

Such attitudes lead to some interesting contradictions. Cars have
an importance greater than the roads on which diey are driven. We
welcome expansion of telephone services as improving the general
well-being but accept curtailment of postal services as signifying
necessary economy. We set great store by die increase in private
wealth but regret the added outlays for the police force by which it is
protected. Vacuum cleaners to ensure dean houses are praiseworthy
and essential in our standard of hving. Street cleaners to ensure clean
streets are an unfortunate expense. Pardy as a result, our houses arc
generally dean and om streets generally filthy. In the more sophisti-
cated of the conventional wisdom, diis distinction between public
and private services is mudi less sharp and, as I have observed, it does
not figure in the calculation of Gross National Product. However,
it never quite disappears. Even among economists and political philo-
sophers, public services rarely lose their connotation of burden.
Although they may be defended, their volume and quality are almost
never a source of pride.

There are a number of reasons for these attitudes, but again tradi-
tion plays a dominant role. In the world into which economics was
bom the four most urgent requirements of man were food, dothing
and shelter, and an orderly environment in which the fint three
might be provided. The first three lent themselves to private pro-
duction for the market; given good order, this process lias ordinarily
gone forward with tolerable effidency. But order which was the gift
of government was nearly alvtrays supplied with notable unreliability.
With rare exceptions it was also inordinately expensive. And the
pretext of providing order not infrequently afforded the occasion for
rapadous appropriation of the means of sustenance of the people.

Not surprisingly, modem economic ideas incorporated a strong
suspidon of government. The goal of nineteenth-century economic
liberalism was a state which did provide order reliably and inexpen-
sively and which did as little as possible else. Even Marx intended that
the state should wither away. These attitudes have persisted in the
conventional wisdom. And again events have dealt them a series of
merciless blows. Once a sodety has provided itself with food, doth-
ing, and shdtor, all of which so fortuitously lend themsdves to pri-
vate production, purchase, and sale, its members begin to d^e

io6

THE AFFLUENT SOCIETY

Other things. And a remarkable number of these things do not lend
themselves to such production, purchase, and sale. They must be
provided for everyone if they are to be provided for anyone, and
they must be paid for collectively or they cannot be had at all. Such
is the case with streets and police and the general advantages of mass
htetacy and sanitation, the control of epidemics, and the common
defence. There is a bare possibility diat the services which must be
rendered collectively, although ^ey enter the general scheme of
wants after the immediate physical necessities, increase in urgency
more than proportionately with increasing wealth. This is more likely
if increasing wealth is matched by increasii^ population and increas-
ing density of population. None the less these services, although they
reflect increasingly urgent desires, remain imder the obloquy of the
unrehability, incompetence, cost, and pretentious interference of
princes. Alcohol, comic books and mouth-wash all bask under the
superior reputation of the market. Schools, judges, and municipal
swimming-pools He imder the evil reputation of bad kings.

Moreover, bad kings in a poorer world showed themselves to be
quite capable, in their rapacity, of destroying or damping the pro-
duction of private goods by destroying the people and the capital
that produced them. Economies are no longer so vulnerable. Govern-
ments are not so imdiscriminating. In western countries in modem
times economic growth and expanding pubHc activity have, with
rare exceptions, gone together. Each has served the o^er as indeed
they must. Yet the conventional wisdom is far &om surrendering on
the point. Any growth in pubHc services is a manifestation of an
intrinsically evil trend. If the vigour of the race is not in danger,
Hberty is. And this may be threatened even by the activities of the
local school board. The structure of the economy may also be at
stake. In one branch of the conventional wisdom the American eco-
nomy is never £u removed from socialism and the movement
toward sodaHsm may be measured by the rise in pubHc spending.
Thus even the most neutral of pubHc services, for one part of the
population, frll under the considerable handicap of being identified
with social revolution.

RnaUy— also a closely related point— the payment for pubHcly
produced services has long been linked to the problem of inequaHty.

THE PARAMOUNT POSITION OP PRODUCTION IO7

By having die rich pay more, the services were provided and at the
same time the goal of greater equahty was advanced. This com-
munity of objectives has never appealed to those being equalized.
Not unnaturally, some part of their opposition has been directed to
the pubUc services themselves. By attacking these, they could attack
the levelling tendencies of taxation. This has helped to keep alive the
notion that the public services for which they pay are inherendy
inferior to privately produced goods.

While pubUc services have been subject to these negative attitudes,
private goods have had no such attention. On die contrary, their
virtues have been extolled by the massed drums of modem adver-
tising. They have been pictured as the ultimate wealth of the
commtuiity. Clearly the competition between public and private ser-
vices, apart from any question of the sads&ctions they render, is an
unequal one. The social consequences of this discrimination— diis
tendency to accord a superior prestige to private goods and an
inferior role to public production— are considerable and even grave.

VI

By way of summary, then, while production has come to have a goal
of pre-eminent importance in our life, it is not a goal which we pur-
sue either vigorously or even very thoughtfully. We take production
as the measure of our achievement, but we do not strive very deliber-
ately to achieve. Our efforts to increase production are styled. We
stress the evils of idleness and bad resource allocation which were
relevant to efforts to increase output a century ago. We do Uttle or
nothing in peacetime to increase the rate of capital formation or the
rate of technological progress in backward industries despite the clear
indication that these are the dimensions along vdiich lai^e increases
in output are to be expected. We rarely deplore the production we
lose in depression. We are protected ffom this loss £ax more by the
threat of depression to economic security. Last of all, on ancient and
traditional grounds, we relegate one important class of production to
a second-class citizenship.

The predictable reaction of many readers will be that we should by
all means address ourselves to the measures for increasing output that

io8

THE AFFLUENT SOCIETY

we now ignore. However, a closer look is called for. We need to
understand the reasons for our passivity in this matter. In the past,
under conditions of emergency, we have addressed ourselves seriously
to the meastu%s by which output is seriously increased. Perhaps we
£ul to do so in present circumstances less because of ignorance or
inertia than because the additional production is not of sufficient
urgency to justify the effort. Our preoccupation with production, in
odier words, may be a preoccupation with a problem of rather low
urgency. We arc not sufficiendy concerned about it to have recoune
to the measures by which production could be effidendy increased.
We are content with what we get, which comes dose to saying that
we are deeply concerned with production only so far as the problem
solves itself. We set great store by doing what, in a manner of speak-
ing, comes naturally.

None of this would be possible if the goods we produced were of
great and urgent importance. Then wc would be searching vigor-
ously for ways of increasing the supply instead, as at present, of
regarding with approval the increases we obtain. All diis becomes
inteUigible, and in degree even obvious, when we contemplate the
elaborate myth with wliich we surround the demand for goods. This
has enabled us to become persuaded of the dire importance of the
goods we have without our being in the sUghtest degree concerned
about those we do not have. For we have wants at the margin only
so £ir as they arc synthesized. We do not manufacture wants ffir
goods we do not produce.

CHAPTER TEN

»

The Imperatives of Consumer Demand

In an economy, such as that of the United States of America, where
leisure is barely moral, the problem of creating sufficient wants ... to
absorb productive capacity may become chronic in the not too distant
future. In such a situation the economist begins to lead a furtive existence.

W. BECKERMAN^

Both tlic ancient preoccupation with production and the pervasive
modem search for security have culminated in our time in a concern
for production. Increased real income provides us with an admirable
detour around the rancour anciently associated with efforts to redis-
tribute wealth. A high level of production has become the keystone
of effective economic security. There remains, however, the task of
justifying the resulting flow of goods. Production cannot be an
incidental to the mitigation of inequality or die provision of jobs. It
must have a raison d'Stre of its own. At this point economists and
economic theory have entered the game. So, radier more recendy,
have those who profess to be the pliilosophcrs on problems of defence
and national security. The result has been an elaborate and ingenious
defence of the importance of production as such. It is a defence which
makes the urgency of production largely independent of the volume
of production. In this way economic theory has managed to transfer
the sense of urgency in meeting consumer need that once was felt in
a world where more production meant more food for the hungry,
more clothing for die cold, and more houses for the homeless to
a world where increased output satisfies the cravinj^ fpi: ni9re ele-
gant cars, more exotic food, more erotic clothing, mote ekboratpi,
^ 'The Economist as a Modem Missionary*, The Economic Jourtf/i^ Mafcjh .Z95d.

109

110

THB APPLUBMT SOCIBTY

entertainmoit— indeed for the entire modem range of sensuous,
edifying, and lethal desires.

Although the economic theory which defends these desires and
hence the production that supplies them has an impeccable (and to
an astonishing degree even unchallenged) position in the conven-
tional wisdom, it is illogical and meretricious and in degree even
dangerous.

II

The rationalization begins with the peculiar urgency of production
not to society but to economic science. There will be occasion later
for considering the vested interest in production, but it may be noted
here that the interest of the economist is unique. The importance of
production is central to his scheme of economic calculation. All exist-
ing pedagogy and nearly all research depend on it. Any action which
increases production from given resources is good and implicitly
important; anything which inhibits or reduces output is pro tanto
wrong. In the choice between two taxes there is a nearly overriding
case for the one tliat least damages efficiency, meaning the output
from a given stock of labour and capital. If a company seems to be
restricting production to enhance returns, or for any other reason, it
can safely be condemned as anti- 40 cial. This is at least equally so with
a trade imion. The test of effect on productive efficiency is all but
universal.

To assess the effect of a given action or measure, say a new union
rule, on production is not always easy. There may be a complicated
chain of cause and effect on which opinions will difier. The efrect on
the short run may be different from that on the long. And where it is
necessary to assess the efrect on a variety of products, or on the total
ouq>ut of the economy, there are numerous difficulties. The latter
must be valued, and die prices at which individual items are valued
will reflect the existing income distribution— the prices of mink pelts
reflect the demand of an opulent minority— or, in some cases, die
more or less arbitrary decision of the firms that administer the prices.
Hence to trace and compare the effect of dififerent policies on the
ou^ut of the economy can be endlessly intricate. But all this pro-
vides much of the interest of economics as wdl as a good deal of its

THE IMPESATIVBS OF CONSUMER DEMAND III

employment. And underlying all is the bedrock agreement on the
goal and on the importance of that goaL Anything that increases the
product &om givoi resources increases wel&te. It is important that it
be done. Here is the anchor. To cast doubt on the importance of pro-
duction is thus to bring into question the foundation of the entire
edifice. Action must dien be tested by new criteria— criteria which
are necessarily difficult and subjective. Nothing could be less wel-
come. At least in social disciplines, obsolescence and irrelevance are a
small price to pay for the privilege of remaining comfortably, even if
archaically, with the familiar, the settled, and the safe.

And the profession of economics is not lacking in the instinct of
self-preservation. The mother bear sees in the threat to her cubs the
ultimate threat to the survival of her kind. She reacts with angry
venom. Nothing is more likely to produce a similar reaction from
defenders of the conventional economic wisdom than an attack on
the edifice which now rationalizes the importance of production and
the urgency of consiuner need.

The parallel with maternal instinct is important, for the defence of
the present value system as it relates to production is largely intuitive.
Few economists in recent years can have escaped some uneasiness
over the kinds of goods which their value system is insisting diey
must maximize. They have wondered about the urgency of the
longer and lower can. They have been uneasy about die lengths to
which it has been necessary to go widi advertising and salesmanship
to synthesize the desire for such goods. That uneasiness has reflected
the crucial weakness of the literature at this point.

Some, moreover, have also noticed the changed position of the
economist in the community. Twraty yean 9^ he was in touch with
the problems of depression and imemployment. Even though there
was less than genoral certainty that he had the answen, he was a
figure of interest and controveny. Now for many yean he has been
in an intellectual backwater. The dentist who seeks the fluoridation
of the city water supply is a more controvenial figure than the eco-
nomist who tells of an eiqianding economy. Once students were
attracted by the seeming urgency of economic problems and by a
sense of their mission to solve them. Now the best come to econo-
mics for the opportunity it provides to exercise arcane mathematical

II2

THB AFFLUENT SOCIETY

skills. Could this mean that society itself is losing its sense of the
urgency of the economic problem? Does it mean that there is now a
subjective realization that increased product is being used to serve
rather unimportant ends? Even the vigour and scorn of the denial
may reflect uncertainty.

As with the bear and her cubs we must expect the reaction to be
increasingly sharp as the danger becomes more threatening. In part it
will take die form of a purely assertive posture. ‘There is still an
economic problem’; ‘ Wc still have poverty’; ‘It is human nature to
want more’; ‘Without increasing production there will be stag-
nation’; ‘We must show the Russians’. But the ultimate refuge will
remain in the theory of consumer demand. This is a formidable
structure; it- has already demonstrated its eflfcctivcness in defending
the urgency of production. In a world where aflluence is rendering
the old ideas obsolete, it will continue to be the bastion against the
misery of new ones.

Ill

Hie theory of consumer demand, as it is now widely accepted, is
based on two broad propositions, neither of them quite eicplicit but
both extremely important for the present value system of econo-
mists. The first is that the urgency of wants does not diminish appre-
ciably as more of them are satisfied or, to put the matter more
precisely, to the extent that this happens it is not demonstrable and
not a matter of any interest to economists or for economic policy.
When man has satisfied his physical needs, then psychologically
grounded desires take over. These can never be satisfied or, in any
case, no progress can be proved. The concqpt of satiation has very
little standing in economics. It is neither useful nor scientific to
speculate on the comparative cravings of the stomach and the mind.

The second proposition is that wants originate in the penonality
of the consumer or, in any case, that they are given data for the
economist. The latter’s task is merely to seek their satisfiiction. He has
no need to inquire how these wants are formed. His function is
suflidently fulfilled by maximizing the goods that supply the wants.

The examination of these two conclusions must now be pressed.
The explanation of consiuner behaviour has its ancestry in a much

THE IMPERATIVES OF CONSUMER DEMAND II3

older problem, indeed the oldest problem of economics, that of price
determination,^ Nothing originally proved more troublesome in the
explanation of prices, i.e. exchange values, than the indigestible fact
that some of the most useful things had the least value in exchange
and some of the least useful had the most. As Adam Smith observed:
‘Nothing is more useful than water; but it will purchase scarce any-
thing; scarce anything can be had in exchange for it. A diamond, on
the contrary, has scarce any value in use: but a very great quantity of
other goods may frequently be had in exchange for it.’*

In explaining value. Smith thought it well to {distinguish between
‘value in exchange’ and ‘value in use’ and sought thus to reconcile
the paradox of high utility and low exchangeability. This distinction
begged questions rather than solved them and for another hundred
years economists sought for a satisfactory formulation. Finally, to-
ward the end of die last century— though it is now recognized that
their work had beai extensively anticipated— the three economists of
marginal utility (Karl Monger, an Austrian; William Stanley Jevons,
an Englishman; and John Bates Clark, an American) produced more
or less simultaneously the explanation which in broad substance still
serves. The urgency of desire is a function of the quantity of goods
which the individual has available to satisfy diat desire. The larger the
stock the less the satisfactions from an increment. And the less, also,
the willingness to pay. Since diamonds for most people are in com-
paratively meagre supply, the satisfaction from an additional one is
great, and the potential willingness to pay is likewise high. The case
of water is just the reverse. It also follows that where the supply of a
good can be readily increased at low cost, its value in exchat^e will
reflect that ease of reproduction and the low urgoicy of the marginal
desires it thus comes to satisfy. This will be so no matter how difficult
it may be (as with water) to dispense entirely with the item in
question.

The doctrine of diminishing marginal utility, as it was enshrined
in the economics textbooks, seemed to put economic ideas squarely

* Ihe provenance of the theory of consumer behaviour is sketched in Mr.
I. D. M. little’s interesting article ‘A Reformulation of Consumer Behaviour’,

Economic Peters, New Series, vol. I, no. i (January 1949), p. 99.

* Wealth of Nations. Smith did not foresee <he industrial diamond.

THE AFFLUENT SOCIETT

II4

on the side of the diminishing importance of production under con-
ditions of increasing affluence. With increasing per capita real income,
men are able to satisfy additional wants. These are of a lower order of
urgency. This being so, the production that provides the goods that
satisfy these less urgent wants must also be of smaller (and declining)
importance. In Ricardo’s England the supply of bread for many was
meagre. The satisfaction resulting from an increment in the bread
supply— from a higher money income, bread prices being the same,
or die same money income, bread prices being lower— was great.
Hunger was lessened; Hfe itself might be extended. Certainly any
measure to increase die bread supply merited the deep and serious
interest of the public-spirited citizen.

In the contemporary United States the supply of bread is plentiful
and the supply of bread grains even redundant. The yield of satis-
factions &om a marginal increment in the wheat supply is small. To
a Secretary of Agriculture it is indubitably negative. Measures to
increase the wheat supply are not, dierefore, a socially urgent pre-
occupation of pubhely concerned citizens. These arc more likely to
be foimd spending their time devising schemes for the effective con-
trol of wheat production. And having extended their bread con-
sumption to the point where its marginal utility is very low, people
have gone on to spend their income on other things. Since these
other goods entered their consumption pattern after bread, there is
a presumption that they arc not very urgent either- that their con-
sumption has been carried, as with wheat, to the point where mar-
ginal utility is small or even negligible. So it must be assumed that the
importance of marginal increments of all production is low and
declining. The efi^t of increasing affluence is to minimize the impor-
tance of economic goals. Production and productivity become less
and less important.

The concept of diminishing marginal utility was, and remains, one
of the indispensable ideas of economics. Since it conceded so much to
the notion of diminishing mgency of wants, and hence of produc-
tion, it was remarkable indeed that the situation was retrieved. This
was done— and brilhandy. The diminishing urgency of Avants was
not admitted. In part this was accomplished in the name of refined
scientific mediod which, as so often at the higher levels of sophistica-

THE IMPERATIVES OF CONSUMER DEMAND II5

don, proved a formidable bulwark of the convendonal wisdom.
Obvious but inconvenient evidence was rejected on the grounds that
it could not be scientifically assimilated. But even beyond this, it has
been necessary at dmes simply to close one’s eyes to phenomena
which could not be reconciled with convenience.

IV

The first step, as noted earlier, was to divorce economics from any
judgment on the goods with wliich it was concerned. Any nodon of
necessary versus unnecessary or important as against unimportant
goods was rigorously excluded from the subject. Alfred Marshall,
who on this as on so many other things, laid down the rules to which
economists have since adhered, noted that ‘the economist studies
mental states rather tlirough their manifestadons than in themselves;
and if he finds they a£ford evenly balanced incendves to acdon, he
treats them prima facie as for his purposes equal’.^ He almost im-
mediately added that this simplificadon, which indeed has rendered
profound scientific service to economics, was only a ‘stardng-point’.
But economists ever since have been content to stay with his starting-
point and to make it a mark of scholarly restraint and scientific virtue
to do so. Nothing is so thorouglily drilled into the minds of the
young as the need for this restraint. Nothing in economics so quickly
marks an individual as incompetently trained as a disposidon to
remark on the legidmacy of the desire for more food and the frivolity
of the desire for a more elaborate car.

Next, economics took general cognizance of the fact diat an
almost infinite variety of goods await the consumer’s attendon. At
die more elementary (and also the more subjeedve) levels of econo-
mic analysis it is assumed that, while die marginal utility of the
individual good declines in accordance with the indubitable law, the
utility or sadsfiicdon from new and difierent kinds of goods does not
diminisli appreciably. So long as the consumer adds new products—
seeks variety rather than quandty— he may, like a museum, accumu-
late without diminishing the urgency of his wants. Since even in Los
Angeles the average consumer owns only a fiacdon of the difierent
^ Prindpkso/Econmks, p. KS.

Ii6

THE AFFLUENT SOCIETY

kinds of goods he might conceivably possess, there is all but unlimited
opportunity for adding such products. The rewards to the possessors
are more or less proportional to the supply. The production that
supphes these goods and services, since it renders undiminished
utihty, remains of undiminished importance.

This position ignores die obvious fact that some things are acquired
before others and that, presumably, the more important things come
first. This, as observed previously, implies a declining urgency of
need. However, in die slighdy more sopliisticated theory this con-
clusion is rejected. The rejection centres on the denial that anything
very useful can be said of the comparative states of mind and satis-
faction of the consumer at difierent periods of time. Few students of
economics, even in the elementary course, now escape without a
warning against the error of intertemporal comparisons of the utility
from given acts of consumption. Yesterday the man with a minimal
but increasing real income was reaping the satisfretions which came
from a decent diet and a roof that no longer leaked water on his face.
Today, after a large increase in his income, he has extended his con-
sumption to include suede shoes and a weekly visit to the races. But
to say that his satisfactions from these latter amenities and recreations
are less than from the additional calories and the freedom from rain
is wholly improper. Things have changed; he is a different man;
there is no real standard for comparison. That, as of a given time, an
individual will derive lesser satisfretions from the marginal incre-
ments to a given stock of goods, and accordingly caimot he induced
to pay as much for them, is conceded. But this tells us nothing of the
satisfretions from such additional goods, and more particularly from
different goods, when they are acquired at a later time. The con-
clusion follows. One cannot be sure that the satisfaction from these
temporally later increases in the individual’s stock of goods dimi-
nishes. Hence one cannot suggest that the production which supplies
it is of diminishing urgency.

A moment’s reflection on what has been accomplished will be
worth while. The notion of diminishing utility still serves its in-
dispensable purpose of relating urgency of desire and consequent
willingness to pay to quantity. At any given time the more the indi-
vidual might have, the less would be the satisfretion he would derive

THE IMPERATIVES OF CONSUMER DEMAND II7

from additions to his stock and the less he would be willing to pay.
The reactions of the community will be the aggregate of the reactions
of the individuals it comprises. Hence the greater the supply the less
the willingness to pay for marginal increments and hence the demand
curve familiar to all who have made even the most modest venture
into economic theory. But, at the same time, the question of the
diminishing urgency of consumption is elided. For, while the ques-
tion of willingness to pay for additional quantities is based on a hypo-
thesis as to behaviour in face of these quantities at a given point of
time, an increase in stock of consumer’s goods, as the result of an
increase in real income, can occur only over time. On the yield of
satisfactions from this the economist has nothing to say. In the name
of good scientific method he is prevented from saying anything.^
There is room, however, for the broad assumption— given die large

^ In the yet more technical analysis of consumer demand, attention has been
further diverted from the diminishing urgency of product by the shift from
cardinal to ordinal utihty as an instrument of analysis. Ordinal analysis treats the
consumer’s desires strictly in terms of the preferences of one good as against the
other. This does not mean either that the notion of diminishing marginal utility of
a good or die diminishing urgency of additional products disappears. In the
indifference map or surface diminishing marginal utility is what makes die con-
sumer willing, with an increasing stock, to surrender more and more of one
product to have a given quantity of another. Recreation will not enter the con-
sumer’s preference system except in combination with some minimum quantity
of food. Food can be present without recreation.

However, these considerations are not obtrusive in the analysis or its pedagogy.
Ihe much more evident fact is that food, gasoline, and pinball all exchange for one
another at given rates and thus are equated one with the other. The point most
stressed in the pedagogy is that the consumer will always find his highest satisfaction
hn the highest indifference curve that his income allows him to reach. The effect of
oigher income or of a larger product at lower prices is to put the consumer on a
higher curve. This goal is impheit in the analysis. Thus a line of thought which once
might seem to throw doubt on the importance of marginal increments to the stock
of goods ends by afSrming it. In practice the analytical apparatus excludes from
consideration the possibility that the movement to higher and higher indifference
curves is of declining urgency.

The unprofessiond reader who wishes to acquaint himself with the essentials of
this analysis will find a competent and ludd summary in Paul A. Samuelson’s
chapter appendix 'Geometrical Analysis of Consumer Equilibrium’, Economics
(3rd ed.. New York, McGraw-Hill, I955)» PP* 43^8.

Ii8

THE AFFLUENT SOCIETY

and ever-growing variety of goods awaiting the consumer’s attention
—that wants have a sustained urgency. In any case, it can safely be
concluded that more goods will satisfy more wants than fewer goods.
And the assumption that goods are an important and even an mgent
thing to provide stalks unchallenged behind, for have not goods
always been important for relieving the privation of mankind? It will
be evident that economics has brilliantly retrieved the dangers to itself
and to its goals that were inherent in diminishing marginal utility.

There has been dissent. Keynes observed that the needs of human
beings ‘fall into two classes— those needs which are absolute in the
sense that we feel them whatever the situation of our fellow human
beings may be, and those which are relative only in that their satis-
faction lifts us above, makes us feel superior to, our fellows’. While
conceding that the second class of wants might be insatiable, he
argued tliat the first were capable of being satisfied and went on to
conclude that ‘assuming no important wars and no important in-
crease in population the economic problem may be solved, or at least
within sight of solution, within a hundred years. This means the
economic problem is not— if we look into the future — permanent
problem of the human race*^ However, on this conclusion Keynes made
no headway. In contending with the conventional wisdom he, no
less than others, needed the support of circumstance. And in contrast
with his remedy for depressions this he did not yet have.

^J. M. Keynes, Essays in Persuasion, ‘Economic Possibilities for Our Grand-
children*, pp. 365-^. The italics arc in the original. Notice that Keynes, as always
litde bound by the conventional rules, did not hesitate to commit the unpardonable
sin of distinguishing between categories of desire.

CHAPTBR ELEVEN

*

The Dependence Effect

The notion that wants do not become less urgent the more amply the
individual is supplied is broadly repugnant to common sense. It is
something to be beUeved only by those who wish to behevc. Yet the
conventional wisdom must be tackled on its own terrain. Inter-
temporal comparisons of an individual’s state of mind do rest on
doubtful grounds. Who can say for sure that the deprivation which
afflicts him with hunger is more painful than the deprivation wliich
afflicts him with envy of his neighbour’s new car? In the time that
has passed since he was poor his soul may have become subject to a
new and deeper searing. And where a society is concerned, compari-
sons between marginal satisfactions when it is poor and those when it
is affluent will involve not only the same individual at different times
but different individuals at diff^ent times. The scholar who wishes
to bcUeve that with increasing affluence there is no reduction in the
urgency of desires and goods is not without points for debate. How-
ever plausible the case against him, it cannot be proved. In the
defence of the conventional wisdom this amounts almost to invul-
nerability.

However, there is a flaw in the case. If the individual’s wants are to
be urgent they must be original with himself. They cannot be urgent
if they must be contiived for him. And above all they must not be
contrived by the process of production by which they are satisfied.
For this means tlut the whole case for the urgency of production,
based on the urgency of wants, &lls to the ground. One cannot
defrad production as satisfying wants if that production creates the
wants.

up

120

THE AFFLUENT SOCIETY

Were it so that a man on arising each morning was assailed by
demons which instilled in him a passion sometimes for silk shirts,
sometimes for kitchenware, sometimes for chamber-pots, and some-
times for orange squash, there would be every reason to applaud the
effort to find die goods, however odd, that quenched this flame. But
should it be that his passion was the result of his first having culti-
vated the demons, and sliould it also be diat his effort to allay it
stirred the demons to ever greater and greater effort, there would be
question as to how rational was his solution. Unless restrained by
conventional attitudes, he might wonder if the solution lay with
more goods or fewer demons.

So it is that if production creates the wants it seeks to satisfy, or if
die wants emerge pari passu with the production, then die urgency
of the wants can no longer be used to defend the urgency of the pro-
duction. Production only fills a void that it has itself created.

II

The point is so central that it must be pressed. Consumer wants can
have bizarre, frivolous, or even immoral origins, and an admirable
case can still be made for a society that seeks to satisfy them. But the
case cannot stand if it is the process of satisfying wants that creates the
wants. For then the individual who urges the importance of produc-
tion to satisfy these wants is precisely in the position of the onlooker
who applauds the efforts of the squirrel to keep abreast of the wheel
that is propelled by his own efforts.

That wants are, in fiict, the finit of production will now be denied
by few serious scholars. And a considerable number of economists,
though not always in full knowledge of the implications, have con-
ceded the point. In the observation cited at the end of the preceding
chapter Keynes noted that needs of ‘the second class’, i.e. those that
are the restdt of ef&rts to keep abreast or ahead of one’s fellow being
‘may indeed be insatiable; for the higher the general level the higher
still are they’.^ And emulation has always played a considerable role
in the views of other economists of want creation. One man’s con-
sumption becomes his neighbour’s wish. This already means that the

* Op. cit.

THB DEPENDENCE EFFECT

121

process by which wants are satisfied is also the process by which
wants are created. The more wants that are satisfied the more new
ones are bom.

However, the argument has been carried farther. A leading modem
theorist of consumer behaviour. Professor Duesenberry, has stated
exphdtly that ‘ours is a society in which one of the principal social
goals is a higher standard of living. . . . [This] has great significance
for the theory of consumption . . . the desire to get superior goods
takes on a Ufe of its own. It provides a drive to higher expenditure
which may even be stronger than that arising out of the needs which
are supposed to be satisfied by that e3q)enditure.’^ The implications
of this view are impressive. The notion of independently established
need now sinks into the badkground. Because the society sets great
store by ability to produce a high Uving standard, it evaluates people
by the products they possess. The urge to consume is fathered by the
value system which emphasizes the ability of the society to produce.
The more tliat is produced die more that must be owned in order to
maintain the appropriate prestige. The latter is an important point,
for, without going as fiu: as Duesenberry in reducing goods to the role
of symbols of prestige in die affluent society, it is plain that his argu-
ment fully implies that the production of goods creates the wants
that the goods are presumed to satisfy.

Ill

The even more direct link between production and wants is pro-
vided by the institutions of modon adverdsii^ and salesmanship.
These cannot be reconciled with die notion of independendy deter-
mined desires, for their central function is to create desires— to bring
into being wants that previously did not exist.* This is accomplished

^James S. Duesenberry, Income, Saving and the Theory of Consumer Behaviour
(Cambridge, Mass., Harvard University Press, 1949), p. 28.

* Adverdsii^ is not a simple phenomenon. It is also important in competitive
strategy and want creation is, ordinarily, a complementary result of efforts to shift
the demand curve of the individual finn at the eiq)ense of others or (less impor-
tantly, I think) to diange its shape by increatii^ die degree of product difi&ren-
tiation. Some of the £diute of economists to identify advertising with vnnt
creation may be attributed to the undue attention that its use in purely competitive

122

THE AFFLUENT SOCIETY

by the producer of the goods or at his behest. A broad empirical re-
lationship exists between what is spent on production of consumcn’
goods and whatis spent in synthesizing the desires for that production.
A new consumer product must be introduced witli a suitable adver-
tising campaign to arouse an interest in it. The path for an expansion of
output must be pavedby a suitable expansion in the advertising budget.
Outlays for the manufacturing of a product arc not more importantin
the strategy of modem business enterprise dian outlays for the manu-
facturing of demandfor die product. None ofdiis is novel. Allwould
be regarded as elementary by the most retarded student in the nation’s
most primitive school ofbusiness administration. The cost of this want
formation is formidable. In 1956 total advertising expenditure—
though, as noted, not all of it may be assigned to the synthesis of wants
—amounted to about ten thousand million dollars. For some years it
had been increasing at a rate in excess of a diousand million dollars a
year. Obviously, such outlays must be integrated with the theory of
consumer demand. They are too big to be ignored.

But such integration means recognizing that wants arc dependent
on production. It accords to the producer the function both of
making the goods and of making the desires for them. It recognizes
that production, not only passively through emulation, but actively
through advertising and related activities, creates the wants it seeks
to satisfy.

The businessman and the lay reader will be puzzled over die
emphasis which I give to a seemingly obvious point. The point is
indeed obvious. But it is one which, to a singular degree, economists
have resisted. They have sensed, as the layman does not, the damage
to established ideas which lurks in these relationships. As a result,
incredibly, they have closed their eyes (and ears) to &e most obtru-
sive of all economic phoiomena, namely modem want creation.

This is not to say that the evidence affirming the dependence of
wants on advertising has been entirely ignored. It is one reason why
advertising has so long been regarded with such imeasiness by econo-
mists. Here is somediing which cannot be accommodated easily to

strategy has attracted. It should be noted, however, that the competitive manipu-
lation of consumer desire is only possible, at least on any appreciable scale, when
such need is not strongly &lt

THE DEPENDENCE EFFECT

123

existing theory. More pervious scholars have speculated on the
urgency of desires which arc so obviously the fruit of such expen-
sively contrived campaigns for popular attention. Is a new breakfast
cereal or detergent so much wanted if so much must be spent to
compel in the consumer die sense of want? But there has been little
tendency to go on to examine die implications of this for the theory
of consumer demand and even less for the importance of production
and productive efficiency. These have remained sacrosanct. More
often the uneasiness has been manifested in a general disapproval of
advertising and advertising men, leading to die occasional suggestion
that diey shouldn’t exist. Such suggestions have usually been ill
received.

And so die notion of independently determined wants still sur-
vives. Ill the face of aU the forces of modem salcsniansliip it still rules,
almost undefiled, in the textbooks. And it still remains the econo-
mist’s mission— and on few matters is the pedagogy so firm— to seek
unqucstioningly the means for filling these wants. This being so,
production remains of prime urgency. We have here, perhaps, the
ultimate triumph of the conventional wisdom in its resistance to die
evidence of the eyes. To equal it one must imagine a humanitarian
who was long ago persuaded of die grievous shortage of hospital
facilities in the town. He continues to importune die passers-by for
money for more beds and refuses to notice that the town doctor is
deftly knocking over pedestrians with his car to keep up the occu-
pancy.

And in unravelling the complex we should always be careful not
to overlook the obvious. The fact that wants can be syndiesized by
advertising, catalysed by salesmanship, and shaped by the discreet
manipulations of the persuaders shows that they are not very urgent.
A man who is hungry need never be told of his need for food. If he
is inspired by his appetite, he is immune to the influence of Messrs.
Batten, Barton, Durstine and Osborn. The latter are effective only
with those who are so far removed from physical want that they do
not already know what they want. In this state alone men are open
to persuasion.

124

THB AFFLUENT SOCIETY

IV

The general conclusion of these pages is of such importance for this
essay that it had perhaps best be put with some formaUty. As a
society becomes increasingly affluent, wants are increasingly created
by the process by wliich they arc satisfied. This may operate passively.
Increases in consumption, die counterpart of increases in production,
act by suggestion or emulation to create wants. Or producers may
proceed actively to create wants through advertising and salesman-
ship. Wants thus come to depend on output. In technical tenns it can
no longer be assumed that welfare is greater at an all-round higher
level of production than at a lower one. It may be die same. The
higher level of production has, merely, a higher level of want
creation necessitating a higher level of want satis&ction. There will
be firequent occasion to refer to the way wants depend on die process
by which they are satisfied. It will be convenient to call it the
Dependence Efflct.

We may now contemplate briefly the conclusions to which this
analysis has brought us.

Plainly the theory of consumer demand is a peculiarly treacherous
fiiend of die present goals of economics. At first glance it seems to
defend the continuing urgency of production and our preoccupation
with it as a goal. The economist does not enter into the dubious
moral arguments about the importance or virtue of the wants to be
satisfied. He doesn’t pretend to compare mental states of the same or
different people at different times and to suggest that one is less
urgent than another. The desire is there. That for him is sufficient.
He sets about in a workmanlike way to satisfy desire, and accordingly
he sets the proper store by the production that does. Like woman’s
his work is never done.

But this rationalization, handsomely though it seems to serve,
turns destructively on those who advance it once it is conceded that
wants are themselves both passively and dehberately the fimits of the
process by which they are satisfied Then the production of goods
satisfies the wants that the consumption of these goods creates or that
the producen of goods synthesize. Production induces more wants and

THE DEPENDENCE EFFECT

125

the need for more production. So far, in a major tour de force, the
implications have been ignored. But this obviously is a perilous solu-
tion. It cannot long survive discussion.

Among the many models of the good society no one has urged the
squirrel wheel. Moreover, as we shall see presently, the wheel is not
one that revolves with perfect smoodiness. Aside from its dubious
cultural charm, there are serious structural weaknesses which may
one day embarrass us. For the moment, however, it is sufficient to
reflect on the diflicult terrain which we arc traversing. In Chapter VIII
we saw how deeply we were committed to production for reasons of
economic security. Not the goods but the employment provided by
their production was the thing by which we set ultimate store. Now
we find our concern for goods further undermined. It does not arise
in spontaneous consumer need. Rather, the dependence effect means
that it grows out of the process of production itself. If production is
to increase, the wants must be effectively contrived. In the absence of
the contrivance the increase would not occur. This is not true of all
goods, but that it is true of a substantial part is sufficient. It means that
since the demand for this part would not exist, were it not contrived,
its utility or urgency, ex contrivance, is zero. If we regard this pro-
duction as marginal, we may say that the marginal utility of present
aggregate output, ex advertising and salesmanship, is zero. Clearly
the attitudes and values which make production the central achieve-
ment of our society have some exceptionally twisted roots.

Perhaps the thing most evident of all is how new and varied be-
come the problems we must ponder when we break the nexus with
the work of Ricardo and face the economics of affluence of the
world in which we live. It is easy to see why the conventional wis-
dom resists so stoudy such change. It is a far, far better thing to have
a firm anchor in nonsense than to put out on the troubled seas of
thought.

CHAPTER TWELVE

The Illusion of National Security

On three nights late in July and at the beginning of August 1943, the
heavy planes of the R.A.F. Bomber Command droned in from the
Nor^ Sea and subjected the city of Hamburg to an ordeal sudi as
Germans had not experienced since the Thirty Yean War. A third
of the city was reduced to a wasteland. At least 60,000 and perhaps
as many as 100,000 people were killed— about as many as at Hiro-
shima. A large number of these were lost one night when a ghastly
‘fire storm’, which literally biuned the asphalt pavements, swept a
part of the city and swept everything into itself. Adolf Hider heard
the details of the attack and for the only known time during the
war said it might be necessary to sue for peace. Hermann Goering
visited the city with a retinue to survey the darn^e and was ac-
corded so disconcerting a reception that he deemed it discreet to
retire.

Yet this terrible event tai^ht a lesson about the economics of war
which very few have learned and some, indeed, may have found it
convenient to ignore. The industrial plants of Hambtiig were around
the edge of the city or, as in the case of the submarine pens, on the
harbour. They were not gready damaged by the raids; these struck
the centre of the city and the working-class residential areas and
suburbs. In the days immediately following the raids production
frltered; in the first weeks it was down by as much as 20 or 25 per
cent. But thereafter it returned to normal. By then the workers had
scanned the ruins of their former homes, satisfied themselves that
their possessions and sometimes their families were irretrievable, had
found some rude clothes and the shelter of a room or part of a room

126

THE ILLUSION OF NATIONAL SBCUBITY 127

in a still habitable house, and had returned to work. On these three
nights of terror their standard of Hving, measured by house-room,
furnishings, clothing, food and drink, recreation, schools, and social
and cultural opportunities, had been reduced to a faction of what it
had been before. But the efficiency of the worker as a worker was
unimpaired by this loss. After a slight period of readjustment, he
laboured as diligently and as skilfully as before.

There is a further chapter to the story. Before the attacks, there had
been a labour shortage in Hamburg. Afterwards, despite the number
killed and the number now engaged on indispensable repairs, there
was no shortage. For, as a result of the attacks, thousands who were
waiters in restaurants and ca&, attendants in garages, clerks in banks,
salesmen in stores, shopkeepers, janitors, ticket takers, and employees
in handicraft industries (which, being small and traditional, were
more likely to be in the centre of town) lost their places of employ-
ment. They had previously contributed nothing to war production.
Their contribution to the standard of living proved dispensable. Now
they turned to the war industries as die most plausible places to find
employment.

Even in the presumptively austere and dedicated world of the
Third Reich, in the third year of a disastrous war, the average citizen
had access to a wide rat^e of comforts and amenities which habit had
made to seem essential.^ And because they were believed to be
ess^dal they were essential. On such matters governments, even
dictatorships, must bow to the convictions of the people even if— the
exceptional case— they do not share them. The German standard of
living was fiur above what vras physically necessary for survival and
efficiency. The R.A.F. broke through the psychological oicrustation
and brought living standards down somewhere nearer to the physical

^ In fact, in 1943 the Gennans were not concentrating their ene^es with parti-
cular severity on war production. In this respect they were almost certainly behind
the British at the time. Until not long before there had been a heady mood of
victory with, inevitably, some relaxation. Quite a few of the Nazi leaden were
sybarites and were thus somewhat handicapped in imposii^ austerities which they
would not practise themselves. A dictatonhip vdiich does not quite trust its people
is likely to be hesitant in imposing hardships. Finally, the strategy of industrial
mobilisation was poorly undostood in Gennany and this strata assumed a short
war. This fidlure of undentanding was most important of all and might be a lesson.

128

THE AFFLUENT SOCIETY

minim um. In doing SO it forced a wholesale conversion of Germany’s
scarcest resource, that of manpower, to war production.

In reducing, as nothing else could, the consumption of non-
essentials and the employment of men in their supply, there is a
distinct possibiUty that the attacks on Hamburg increased Germany’s
output of war material and thus her military effectiveness.^

II

On few matters docs tlie conventional wisdom have such authority
as in mihtary poUcy and international affairs. The problems here are
difficult and infinite in their ramifications. Old ideas and old formulas
are rocks on which men can stand. They are cherished as much as
new thought, which so adds to die complexity of an already uncer-
tain and complex world, is resisted. Moreover, where military policy
is concerned, die effect of peace is to exempt the convendonal wis-
dom from any test by experience. Since, as noted, it is ordinarily only
experience which eijqposes error, the conventional wisdom is here
admirably protected. Countries have rarely gone to war, at least in
the last century, without discovering that the military wisdom which
they had treasured in the previous period of peace as the nearest thing
to divine revelation was, when put to the test of circumstance,
remarkably foolish. In the thirties few things were so thoroughly
accepted as the invincibihty of the Maginot Line, the stalwart effec-
tiveness of the French Army, the speed and effbrdessness with which
American industry could convert to war, the dayhght bombing
virtuosity of the A.A.F., the great effectiveness of blockade and eco-
nomic warfare, and the congenital weakness of Russia. All when put
to die test of experience wore found wanting. Understanding, as we
do, the nature of the conventional wisdom, this will no longer
surprise us.

the years following World War n nothing had such massive

^ These details are based on studies made in 194.5 hy the United States Strategic
Bombii^ Survey (of which I was a director) which included a detailed investi-
gation of the efiea of the Mambu^ raids. Ihe Germans had an understandable
pride in the speed of Hamburg’s industrial recovery and detailed recoids
which much fualitated the investigation.

THE ILLUSION OF NATIONAL SECURITY 129

Standing in the conventional vrisdom as the proposition that there is
a direct correlation between national power and economic output.
National power and therewith defensive capabiUty and external
security increased pari passu with increases in the Gross National
Product. A country with a higher rate of increase was on the way to
ultitnatc victory. ‘The ultimate survival of tlie &ee nations may well
turn on their ability to develop their productive power. . . . The
Soviet rulers arc counting heavily on the economic growth of the

Soviet Union ‘On that day when the non-Communist world

finds the way in which it can outrun the Communist world in the
rate of growtli without using totalitarian means, Communism will
be defeated— and until then it will not be.’*

There was even a degree of quiet pride in die sophistication of such
conclusions. Men at last saw the bearing of economics on military
capacity. Until Napoleonic times armies freely destroyed the economy
of a country, even a friendly one, in order to victual their troops.
As late as World War I generals went ahead with military plans in
blithe ignorance of the abiUty of the economy to supply the support-
ing mathiel. Indeed it was the strategic pccuUarity of that conflict
which first brought home the importance of economics. Men stood
shoulder to shoulder in a continuous line from the Channel to

* Assistant Secretary of State before Nindi International Banking Seminar,
Rutgers University, Jdy 9, 1956.

* Former State Department economist. New Republic, April 29, 1947.

'While die conventional wisdom regularly accepts production, or rather the rate
of increase in production, as the single and sufficient measure of national power,
independent scholars have on occasion pressed the matter further. An interesting
instance is an article by Mr. Peter Wiles (‘Growth versus Choice’, Economic
Journal, vol. LXVI (June 1956), pp. 244-55). Mr. Wiles dismisses at the outset the
notion that production can catch up with wants. ‘We need not here consider the
possibility of an “exhaustion of consumption opportunities” . . . when produc-
tivity is so great that all consumer needs can be satisfied. . . . Suchastateofaflairs,
if possible at all, is obviously very fiu: off indeed.’ He then proceeds to argue the
urgency of a greater rate of growth in the West so that more resources wiU be
available for domestic investment and capital exports. But obviously, if growth
itsdf fosters the wants— if the two are interdependmt— the extra resources will not
become available for die purposes for vriiich he seeks them. Indeed the very
question he poses, Growth venus Choice, is a fidse one if the promotion and
manipulation of the chooting is part of die process of production a^ growth.

130

THE AFFLUENT SOCIETY

Switzerland and had to be supplied. It was the highest tniHtary doc-
trine that they could not advance except after a mighty eruption of
steel and explosive. Thus it came to pass that even the most dashing
cavalry officer could see that the scale of the supporting economy had
something to do with the size of the supporting barrage.^

Aided by this background it became possible in World War II to
persuade almost everyone that the might of armies was related to the
might of the economics that suppUed them. The index of the latter
was the Gross National Product. In the end victory did lie with die
greatest G.N.P. This concept was then promptly embedded in the
conventional wisdom as the new dimension of miUtary power. There
it remains. And we react with satisffiction to die knowledge that we
are avrare of something more subde than merely the bigness of the
battalions. We are the viedms of a serious and possibly a dangerous
new illusion.

Ill

It will be evident, although this is only a first approximation, that it
is not gross output but usable miUtary output which counts. If all
that is produced is required to sustain civilian consumption and none
remains for military use, then production may be large and military
strength can be very small indeed. One must consider both die avail-
able economic resources and the demands upon them. To talk of
production without talking of related consumption is, obviously,
like assessing the capacity of a barrel for catching water by consider-
ing its size and ignoring the detail of whether it is already full.

But there is much more to the problem. The size of the barrel

^ Ludendorff, in a highly rhetorical observation, attributed the German defeat to
the ‘pitiless efficiency’ of the American industrialists who he said understood war.
In the conventional wisdom his compliment has the standing of canon law. No
other observation has been more used to argue the importance of economic per^
fotmance for military power. In £u:t, Ludendorff did not know what he was
talking about. A man of slight economi 'knowle^e, it would have been surprising
if he had been able to relate economic to military power. British and French
industrial power were, in bet, far more effective t^ oui own. The year and a
half of our engagement was not sufficient to bring our matMet to die Western
Front in decisive quantities and, in bet, our troops were extensively supplied with
British and French weapons, as veterans of the conflict ate aware.

THE ILLUSION OF NATIONAL SECURITY I3I

becomes almost entirely irrelevant for measuring its ability to hold
the rainwater if there are circumstances which trad always to keep
it full. And this is the tendency of the economy, given ^e depen-
dence eflfect. We increase its size but we do so by increasing, in one
way or another, the demand for what it produces. This demand
having increased along with the economy, it follows that there will
never be much left over. If to increase economic output we must
increase the desires for that output, things cannot be otherwise. If one
more metaphor may be allowed, a balloon cannot be larger than the
gas that is pumped into it.

In part these relationships are simply ignored by the conventional
wisdom. Total production is the accepted measure of total resources
available for defence, and that is the rad of it. There are few enough
solid truths in this world. Why doubt those we have?

At a more sophisticated level, however, there is an unquestioned
assumption that in any emergency civilian wants can be easily and
quickly suppressed and the production that has gone into satisfying
^em will then be available for public deployment. In &ct, as will be
argued presently, the resources that best serve peace or survival may
be most needed in peacetime— when no emergency has been pro-
claimed which would justify cutting civilian wants. A society that
expands production by expanding wants can never have a large
margin available over seeming need. But the notion that production,
given the dependence eSSxt, can be readily made available in time of
crisis involves appalling contradictions. Ihey mig^t easily have be-
come fatal had modem technology not rendered obsolete the con-
cepts of defence to which they are relevant.

For what is being suggested is that a society which in peacetime
attributes the highest importance to the satis&ction of consumer
wants— in which people are taught to believe that a great range of
goods is essential for existence and elementary happiness— will, in the
event of a national emergency, divest itself of these attitudes as simply
and naturally as a man removes his nightshirt on atisii^. Needs so
carefully nurtured will be forgotten. As a result, the capacity that
supplied the goods can quickly be made available to the common
e£R>rt. Having come to believe, like the people of Hamburg, that a
given standard of living is minimal, and having been brought to this

THE AFFLUENT SOCIETY

132

conclusion by the ei&rts of the world’s most capable propagandists
and penuaders, supported increasingly by the nation’s most com-
petent psychologists, they will divest themselves of this misconcep-
tion ef&rtlessly and unreluctantly and reduce their standard of living
as required.

Patently this is nonsense— or at least a remarkable gamble. It is
tantamoiuit to saying diat delusion will last imdl it is about to be-
come fatal, at which point an onset of sanity is certain. It is fiur more
likely diat, having been persuaded of the need for cats as part of our
way of life and that need being further affirmed by a pattern of living
that makes us dependent on them, we will remain persuaded of the
need for cars. That means that we will need the petrol that powers
them, the service stations that service them, the mechanics and the
parts that keep them in operation, and even the new vehicles which
replace the inevitable casualties of age and accident. As with cars so
with kitchens, clothes, television, food, dishwashers, recreation, and
nearly everything else. If we are committed to oil heat and oil
burners in peacetime, will we be quickly uncommitted in time of
emergency? Is it practicable to suppose we can be? If we believe that
fresh firozen orange juice is essential for our peacetime health, will we
be quickly unpersuaded under the threat of war? This is not a case of
a democracy being unwilling to make sacrifices. It is the very difi^r-
ent case of a people who have persuaded themselves that these things
are essential and cannot be sacrificed. Though the bamboozling was
infinitely costly, we arc none the less expected to believe tliat the dc-
bamboozling will be a simple act of rational will.

This argument must not be carried to extremes. Something can
always be squeezed out. Some wants can be suppressed and some can
be contracted. There can be savings here and there. And, thoi^ let
no one seize on this as a serious concession, the savings, other things
equal, can be larger in a large economy than in a small one. But the
total of such savings cannot be equated with total production. Only
a small part of the latter, in an economy where the depoidence effect
is operative, can be made available. In past periods of crisis, the
amount thus made available for defence was comparatively small.
Far more impressive was the output that became available as the
result of serious and deliberate, as distinct firom formal and passive,

THE ILLUSION OF NATIONAL SECURITY 133

efforts to increase production.* We were saved, not by the size of the
economy, but by our imused ability to expand it.

IV

Lest anyone suppose that this argument is academic, it is readily
verified from experience, although in tlie central case of World
War II, the lessons have been deeply disguised by the otherwise for-
timate fact that we won the war. In 1941, as the danger of war
became more and more evident, consumption was growing rapidly.
This liigh and increasing level of consumption, together with
domestic rearmament and aid to the British and other allies,* could
not for long be provided out of the current capacity of the economy,
at least without subjecting military supply to serious delays. Pro-
posals were made in 1941 to cut back the production of civilian con-
sumers* goods. These were fiercely resisted, most notably by the
businessmoi who had come to Washington to help mobilize the
economy. Motives were mixed, and the passion of the time produced
many accusations. Jockeying for competitive position, the fear of
loss of peacetime markets, the well-developed tendency of the busi-
nessman in government to mistrust the long view and to assume that
tilings will work out, all played a part. But underlying everything
was the ultimate fact that people wanted the goods, regarded them as
important, and that the men who made the goods shared the latter
conviction and wanted to supply them. While there was a certain
amount of intellectual resistance to these attitudes, they prevailed
throughout 1941 and in an administration not noted for its identifi-
cation with business. There were no important cutbacks in 1941, nor
were any serious efforts made to arrest the increase in consumption.
Had the New Deal been a business-orientated administration, the
issue would scarcely have arisen.

Nor did the situation change nearly as much as is commonly sup-
posed after the outbreak of war in December of 1941. Although not
without difficulty, the production of metal-using goods was cut

* See pages 97-104.

* Domestic rearmament began in a serious way in 1940 foUowii^ the M of
France. The Lend-Lease bill was enacted early in 1941.

134

THE AFFLUENT SOCIETY

dowa or suspended. War, more precisely an old-fashioned war,
makes a special demand on metals. But the consumption of goods in
the aggregate was not reduced. On the contrary, it increased in every
year of the war. Measured in constant (1947) prices the supply of
consumers’ goods available to and purchased by consumers increased
firom $122*5 thousand million to $145*2 thousand million worth
or by about $23 thousand million firom 1940 to 1945. In the next
five firee and unrestricted peacetime years the increase was not over-
whelmingly greater— it was a little tmder $38 thousand million.^
We did not use our productive capacity for war purposes in World
War II in any meaningful sense. Rather we made concessions in our
metal-producing and metal-using industries— it is significant that the
Controlled Materials Plan, the most formidable and fiur-reaching of
the wartime production controls, worked by limiting the use of a
handful of scarce metals. We relied principally on our abihty, then
especially large because of previous imcmployment, to increase pro-
duction. An additional amount of capacity was obtained by the post-
ponement of peacetime civilian investment.

No one can doubt that it would have been profoundly difficult to
arrest the increase in wartime civihan consumption. To reduce it in
the absence of the assistance of enemy action as in Hamburg would
assuredly have been formidable. This does not presuppose a shortage
of patriotism. Rather it reflects the attitudes which ^e dependence
effect makes inevitable. If people and their leaders alike arc persuaded
that goods are important— as diey must if production depends on
persuasion— they cannot be quickly persuaded that they are unim-
portant. If a high standard of Hving is central in the American way of
life, it will even be said that it is paradoxical to abandon it in a war to
preserve the American way of life. With time and eflbrt the paradox
can perhaps be resolved, but for that the leaden must have the
requisite imdentanding. And leaden in a democracy are a part of the
culture.

During World War II few things were so firequently emphasized
as the importance of maintaining civilian morale. In the conventional
wisdom of the time this was regarded as exceptionally important and
exceptionally firaih It was also regarded as d^ending, all but exdu-
^ Department of Commerce Estimates. Statistical Abstract, 195^.

THE ILLUSION OF NATIONAL SECURITY I35

sively, on the supply of consumer goods and services— on the quality
of die housing, the supply of petrol, the availability of recreation,
even, as in the case of Los Angeles and other communities, the con-
tinued operation of the race-track. Leadership attitudes, no less than
others, accq>ted the need for the consumers’ goods and services
which the dependence effect had made to seem urgent. The process
of expanding production ensured that the production would not be
readily available for other than civilian consumption.

As noted we won the war. We had the good fortune to be on the
side of overwhelming manpowo: and vasdy superior strategic
position. We were blessed by the time in which to increase output.
We had the support of two allies with far smaller productive plants
but far greater abihty to use diem for military purposes. Ever since
the war ended it has been a source of the most profound pride in the
conventional wisdom that, while winning the greatest war in history,
we were able to increase our dvdian consumption by nearly 20
per cent. But had we lost there would have been a different, less
comforting, though clearer view. Then discreet conversation, after
dealing with the uncouth behaviour of the occupying army, the
ambiguous reactions of a neighbouring daughter to rape, the ordeal
of the Jews in the Bronx, and the increase in collaboration, would
have turned to die management of die war. Generals might not have
escaped rebuke. But certainly no one would have mentioned with
mu^ approval the reemrd output of clothing in the years before the
final defeat, the expansive food supply supported by special pro-
visions in the draft, the exceedingly adequate supply of petrol, the
remarkable raepansion of other civilian goods, the record rail travel,
the way the railways were able, at the cost of a very large investment
in rolling stock and roadbed, to accommodate the unparalleled
volume of civilian and military business. It would then have been
seen how Htde of our economic capacity we used for the war. It
would then have been sensed that our presumed civilian needs kept
miUions of men from facing the enemy or from supporting with
weapons and supplies those who did. Fortunately we were saved the
lesson. Unfortunately, given the power and the comfort of the con-
ventional wisdom, it is mostly by such lessons that nations learn.

136

THE AFFtUENT SOCIETY

V

There is a marked likelihood that the foregoing argument rests on
military assumptions which are obsolete. We have probably had the
last of die conflicts diat, even remotely, could be called a Gross
National Product war. It is implausible to suppose that the United
States will for a third time have a chance to mobilize and deploy its
industrial resources in an orderly, undisturbed fashion while the
enemy is fought by fnends on distant fronts. But attitudes on the
relation of production to military power are rooted in the past. As
always, the conventional wisdom must first be attacked on its own
grounds.

If one is condemned to consider the possibihties, there now remain
very broadly two possible kinds of wars. One follows the pattern of
the Korean war where the scale, objectives, and weapons are all
circumscribed. There is also the atomic and thermo-nuclear holo-
caust.

The aggregate output of the economy is obviously unimportant
for the limited war. The U.S. economy was not tested by the
Korean war, nor would it have been by several. The defeats in the
early months were the result not of a shortage of ultimate resources,
but of a shortage of trained manpower and weapons either in being
or in position. The problem was not the potential but the prq>ara-
tion.

The lack of preparation rested on two factors. There was the
simple miscalculation of the likelihood of the event. But there was the
further fact that during the preceding five years from 1945 to 1950,
although production had been higher than ever before in peacetime,
consumer requirements had been equally h%h as befits an economy
where their level depends on the level of production. In consequence
(though as always other forces were at work), military outlays had
been kept to a level where they did not interfere appreciably with
civilian consumption.

Once the war broke out in Korea, the civilian economy and the
effort to protect the conventional standard of living became an
immediate and dear-cut threat to the efl^tive prosecution of the

THE ILLUSION OF NATIONAL SECURITY 137

war. Consumers, anddpadng possible sliortages, immediately began
to protect dicmsclves against a deprivation which, in light of their
peacetime persuasion, they inevitably regarded as painful or even
intolerable. They proceeded to the shops to equip themselves with
cars, radios, kitchen durables, washing-machines, irons, furniture,
canned goods, and other products in unprecedented volume. From
the second quarter of 1950, the last three months of peace, to the
third quarter, the first three months of the war, expenditures for
national defence increased $1*8 thousand million. Consumer expen-
ditures increased $13*1 thousand million. By the first quarter of 1951
defence spending was up $12*9 thousand milUon as compared with
the last peacetime quarter, but civUian spending had increased $19
thousand million. Under these circumstances the size of the eco-
nomy was almost irrelevant. The efforts of consmners to sustain (and
given die uncertainties of the future, to ensure) what persuasion had
caused them to regard as a minimum standard of living effectively
pre-empted the total output of die economy and more. The result
was a damaging inflation. In the early part of 1951 it was necessary to
impose price controls. Meanwhile military production was increasing
slowly and painfully in the face of the civilian competition for goods.
The conventional wisdom continued to emphasize the importance
of the size of the economy and its rate of growth in assessing our
military power.

Nor has further evidence challenged the cUchd.^ In the yean flrom
1953 to 1957 theDepartmentof Defence was headed by Mr. Charles E.
Wilson, a former President of General Moton. The Department
of the Treasury was headed by Mr. George M, Humphrey, a former
head of the M. A. Hanna Company. Both of these industrialists
stoudy maintained throughout this period that what the United
States could spend on defence was striedy circumscribed. It would be
dangerous, they warned repeatedly, to spend more than we could
afford. To do so would only bring comfort to our enemies, distress
and consternation to our own people, and serious, thou^ mosdy
unspecified, damage to our economy.

Their position was widely criticized. Economists and journalists

s Since diis was written, Russian technological advances have indeed diallenged
the conventional wisdom at diis point.

P*

THE AFFLUENT SOCIETY

138

joined in emphasizing their error. The objects of the criticism were
not notably impressed. Nor was there particular reason why they
should be. They were accepting the position of their critics and
carrying it to its inevitable, if absurd, conclusion. The critics them-
selves asserted the importance of production for miUtary power. In
doing so diey underwrote, without realizing it, the importance of the
civilian goods being produced and hence tlie unavailabiUty of die
capacity for miUtary purposes. Messrs. Wilson and Humphrey
merely made diis point expheit. They noted, as must be so given the
dependence effect, that consumption had grown pari passu with pro-
duction, that to divert some of the latter to mditary purposes would
be at the expense of consumption. And accepting the logic of the
situation, along with the importance that society attaches to consump-
tion, they concluded that tliis could not be afforded. Any other con-
clusion would have been remarkable. Men who have spent their
hves making cars, or providing raw materials to that industry, do not
easily conclude that cars are unimportant.

If production is held in liigh esteem, then we shall also esteem the
goods we produce. As a result there will always be close limits on
what we can spare for military purposes. Given the present economic
goals, there always will be. The size of the economy, by which so
many set store, is quite illusory as a clue to what is available.

If a sizeable armed force is necessary for protection against small
disputes— if men can devise no better arrangements for conciliation
than recourse to arms— then productive virtuosity and growth are
no guarantee that we shall have it. On the contrary, the processes of
growth, as they now operate both on output and on wants, are as
likely to be damaging as helpftd to such power.

VI

One of the tolerable features of old-fashioned wars was that the
mihtary planner could proceed with his task in the reasonably secturc
knowledge that in the event of hostihties someone else would be
killed. This contributed to the interest and the sense of detachment
which he brought to his task. Planning for thermo-nuclear warfare,
the other type of conflict with which presumably we must reckon, is

THE ILLUSION OF NATIONAL SECURITY I39

a more disenchantii^ task. These weapons make it likely that die
planner, along with everyone else, will be extinguished under cir-
cumstances which allow for a minimum of graceful gestures at
the end.

Yet if only for pressing home a point, it is evident that such con-
flict will allow for no time-consuming conversion of consumers’
goods capacity and productive skills to war purposes, and it thus
reduces nearly to irrelevance the bearing of civilian production and
capacity on military power.

The perilous strategy of deterrence, on which for the present we
rely, places its emphasis on peacetime preparedness— on warning
systems, interception, a retaliatory force in being, shelters and, per-
haps most of all, a scientific dynamic of the highest order. But here,
once again, the question is not the size of the economy, but how
much can be diverted to public purposes. (This includes not only
public spending for weapons and protection but also for schooling
and training the highly developed manpower that is required.) The
same process which makes the economy large makes large the private
demands upon it and makes small what seemingly can be spared for
public use. Even the conventional wisdom, with its reiterated em-
phasis on the all-embracing importance of ou^ut, will occasionally
concede the difficulty in extracting resources for tbe present purposes.

VII

The purpose of the foregoing argument is to deal with a myth— the
mydi that military power is a function of economic output. If peace
and survival are to be achieved, the search must almost certainly
go beyond the effort to find a balance in thermo-nuclear terror.
The present analysis bears strongly on ibis search. There will be
occasion to return to these matt^, but a preliminary word is in
order.

The role of the rich man in the poor community has never been an
easy one although it is notewordiy, considerit^ the number of philo-
sophers who have dwelt on the miseries of riches, that £ew men of
means have found it desirable to exchange their wealth for die more
graceful situation of the insolvent. The American rich, as noted in

140 THE AFFLUENT SOCIETY

Chapter Vn, have long since found it wise, as well as more fashion-
able, to suppress the cruder manifestations of opulence. They now
seek prestige not by determinedly adding to their hoard but in public
toil and good works. The number of exceedingly well-to-do Ameri-
cans who have made a success in politics as die accepted friends of the
masses attests to the success of the formula. The rich may have their
problems, but they are not insuperable.

The analogy between men and states is an exceedingly perilous
one, but here at least there is a parallel. We are led, as a nation, by our
present preoccupations, to adopt numerous of the least elegant pos-
tures of wealth. Though we have much, and much of the remainder
of the world is poor, we are single-mindedly devoted to getting
more. This is for the satisfaction of wants which our well-being has
induced or which— and the advertising art is not one which by its
nature can be concealed— we have synthesized. And we are, on the
whole, rather solemn about the whole process.

We do, each year, provide some aid for others. But first we have
a prayerful discussion of whether or not we can afford the sacrifice.
The question is, indeed, inescapable, since production keeps wants
abreast of itself. Elsewhere in the world, however, it is our vast well-
being and not the urgency of our need which is evident. The nine-
teenth-century plutocrat who devoted his energies to expanding his
already considerable income; who was led by his competitive posi-
tion in the plutocracy to Hve on a suitably ostentatious scale; who
found, as a result, diat his income was never entirely adequate; who
came to the aid of the poor only after a careful consideration of their
worth, his ability to spare from his needs and the realistic likelihood
of revolt and disorder if he abstained; and who beUeved withal that
God inspired his enterprise and generosity and often said so, was not
in all respects an attractive figure. Thus with nations.

Without entering further into the matter it is plain that our wealth
is a valuable weapon. No other country has its equivalent. It is, pre-
sumptively, a valuable instrument for reducing the tensions that grow
out of privation, helping to organize international order and thus
possibly to ensure survival. But as things now stand it is lai^ely un-
available and to the extent that it is available its usefulness is gravely
impaired.

THE ILLUSION OF NATIONAL SECURITY I4I

In recent times no problem has been more puzzling to thoughtful
people than why, in a troubled world, we make such poor use of our
affluence. Some failure of statesmanship has been regularly assumed.
Now it is clear that the trouble lies mudi deeper. It is an aspect of our
economic attitudes. It will persist as long as these remain imexamined.

CHAPTER THIRTEEN

The Vested Interest in Output

The notion of a vested interest has an engaging flexibility in our
social usage. In ordinary intercoune it is an improper advantage
enjoyed by a political minority to which the speaker does not himself
belong, ^^en the speaker himself enjoys it, it ceases to be a vested
interest and becomes a hard-won reward. When a vested interest is
enjoyed not by a minority but by a majority, it is a human right.
These conceptual pitfalls notwithstanding, the time has come for a
survey of the vested interests in our present attitudes toward pro-
duction. Who is most dependent on the present illusion? Who will
be most affected when, under the onslaught of ideas, circumstances,
and time itself, these matters come to appear in a clearer light? As a
general makes a reconnaissance of the opposing forces, the author
should know who is dug in against him. Moreover, along with the
accepted theory of consumer demand and the conventional attitudes
on national security, we must allow a place for self-interest as a
bulwark of present attitudes. It is known to play a certain role in our
society.

Without question the individual with the greatest stake in the
present economic goals is the businessman— more precisely, perhaps,
the important business executive. If production is of preoccupying
importance he, as the man with the traditional and established right
to the title of producer, will be the dominant figmre in the social
constellation. Society will accord him prestige appropriate to the
role he plays; what may well be less important, he wiU be able,
without difficulty or criticism, to command an income that is related
to his prestige. As production has increasingly monopolized our

142

THE VESTED INTEREST IN OUTPUT 143

economic attitudes, the business executive has grown in esteem. So
long as inequahty was a matter of serious concern the tycoon had,
at best, an ambiguous position. He performed a function of obvious
urgency. But he was also regularly accused of taking far too much
for his services. As concern for inequality has declined, this reaction
has disappeared. The businessman is no longer subject to a serious
cliallenge of any sort. Although in his hierarchical role in the large
corporation he has, perhaps, been more successful than most in
eliminating economic insecurity, both personal and institutional, he
has even managed to retain a certain cachet as a risk-taker, a man who
lives dangerously. No one questions the superior position of the
businessman in American society. But no one should doubt that it
depends on the continuing preoccupation with production.

The case of water under conditions of plenty and shortage has been
mentioned before. In the year 1950 the City of New York suffered
from a potentially troublesome water shortage. Clouds were watched
anxiously and seeded in the hope that they might yield their burden.
With fanfare a programme of water conservation was launched. The
washing of cars, dripping of taps, sluicing of streets, and cooling of
air were all prohibited. Presiding over the considerable publicity
wliich these results required was the New York City water com-
missioner, Mr. Stephen J. Camey. For a time he was the most impor-
tant man in the metropolis. His name was on everyone’s tongue.
Mr. Camey was a public figure. Then the rains came, and the reser-
voirs filled. Camey was forgotten. One day he was quietly dropped.
No one noticed.

The title of producer in our society seems securely honorific. The
head of a distillery, a drive-in theatre, or a dog trade is a producer.
He is not a basic producer which is better, but a producer none the
less. As such he enjoys a position in the community as one of its
supports or pillars and the sources of its wealth, whii^ is not neces-
sarily mjoyed by the high-sdiool prindpal or the parish priest. It is
as a producer that the president of the United States Steel Corpora-
tion calls on the President of the United States. We are glad to see a
department of government in the hands of a production man.
Nothing better can be said of any individual than that he knows
production. But the prestige of the producer is only the prestige of

144

THE AFFLUENT SOCIETY

production. Should production ever come to be taken for granted,
so, in some measure, will the producer. Mr. Carney is a warning.

II

Men fight for what is important to them, and the businessman who
senses his self-interest will battle vigorously for a value system which
emphasizes the importance of production. Indeed, and perhaps more
intuitively than otherwise, he already docs. The business liturgy now
accords an important place to resonant assertions of the vital role of
production. ‘ Only the productive can be strong. Only the strong can
be free.’ ‘Production made America . . .’ ‘Let us stop bickering and
produce.’

The widespread suspicion and even hostility of businessmen to
government, even when, as in the case of the Eisenliowcr Adminis-
tration, it was presumptively sympathetic to business, is one of the
great constants in our political life. In part tliis is because the business-
man is a sizeable taxpayer and hence regards government services as in
conflict with his economic interest. But we are too addicted in our
social comment to a kind of mechanical economic determinism.
Modem government also represents perhaps the major threat to die
businessman’s presdge. To the extent that problems of military
defence, foreign policy, agricultural administration, public works,
education, and social welfare arc central to our thoughts, so the
generals, foreign service officers, administrators, teachers, and other
professional public servants are the popular heroes. Businessmen have
almost certainly sensed this competition in modem times, and it is
equally certain that it has conditioned their attitudes toward govern-
ment. One of its manifestations is a vehement insistence that the
government does not produce anything, that it is a barren whore.
‘Government is powerless to create anything in the sense in which
business produces wealth and individuals produce ideas [and] inven-
tions. . . .’^ The case involves some rather strained argument— it
makes education unproductive and the manuflicturer of the school
toilet seats productive— but, none the less, it has a position of con-
siderable prominence in the business hturgy.

^ Sutton, et al. The American Business Creed, p. 195.

THE VESTED INTEREST IN OUTPUT I4.5

A tension, perhaps ultimately more important, has also long existed
between businessmen and the intellectuals. ‘The emergence of a
numerous class of . . . &ivolous intellectuals is one of the least wd-
come phenomena of the age of modem capitalism. Their obtrusive
stir repels discriminating people. They are a nuisance.’^ As in the case
of the government the basis of the tension has long been assumed to
be economic. ‘The men whose research has given rise to new
methods of production hate the businessmen who are merely inter-
ested in the cash value of their research work. It is very significant
that such a large number of American research physicists sympathize
with socialism and communism. . . . University teachers of econo-
mics are also opposed to what they disparagingly call the profit
system. . . However, although the actual or suspected social radi-
calism of intellectuals may well contribute to hostility between
businessmen and intellectuak, it is most doubtful if the tension would
disappear even were intellectuals to conform their social attitudes to a
line laid down by Senator Jolm W. Bricker of Ohio. Scientists,
writers, professors, artists are also important competitors of the
businessmen for public esteem.

This competition is especially noticeable in comment on public
affairs— economic policy, foreign policy, the effect of government
measures on popular morals and behaviour. Perhaps the most
honorific function in our time is that of social prophecy. No one
enjoys quite such distinction as the man who, by common consent,
is allowed to look ahead into the unknown and tell us what will
happen and advise us as to what we should do to promote or retard
a particular occurrence. The intellectual naturally assumes his author-
ity on these matters. He is likely to be gifted wdl beyond the busi-
nessman in erudition and oral capacity. That felicity the businessman
counters by stressing his identification with production. He is not a
‘theorist’ but a practical man. He has the forthright approach of the
man who knows how to get dungs done. He has learned about life in
his own shop; this has provided him with a imique insight into how

^ Ludwig von Miies, The Anti-Capitalistic Mentality (Princeton, Van Nostrand,

*956), p. 107.

*IbU., p. 20. Professor Mises, it should be observed in fairness, would be
regarded by most businessmen as rather extreme.

THE AFFLUENT SOCIETY

146

things are in the country at large or the world. Nodiing is more
suggestive in our social attitudes than the notion that almost any
issue, however cosmic, can be best appreciated by a man who has had
some practical experience with a ladie. Were anything to happen to
the prestige of production, it is plain that the businessman, whose
mystique is his identification with production, would sufier severely
in Iiis competition with the intellectual for the role of social prophet.
If he wishes to defend himself in his present role, he must defend the
importance of production. He can almost certainly be expected to
do so.

There will be occasion presently for a further word on the com-
petition between the businessman and the intellectual for contem-
porary esteem.

Ill

Politics have long been known to make incongruous bedfellows.
More rarely, however, have those between the same sheets remained
largely unaware of their intimate if odd companionship. This is the
strange case with the vested interests in production. Supporting the
businessman on the all-importance of the production of goods is
the professional American liberal. The prestige which the businessman
derives from production is reinforced by the nearly full weight of
American liberal and radical comment. The reason for diis alliance,
though it requires some explanation, is not essentially complex. Men
who hold tenaciously to a life raft may expect to be cast upon strange
shores among strange companions. So it is with those who hold long
enough to an idea amid dunging currents and tides. As so often
happens, the course of developments in Britain, in broad contour if
not in detail, has been much the same as in the United States.

Until about twenty-five years ago the American liberal, so fiur as
he was concerned with the total output of the economy, addressed
himself to the problem of the efficient use of the available resources
in capital, manpower, and materials. He insisted not without passion
that this goal be not defeated by monopoly, tari£&, labour, or capital
immobility, or other interferences with optimal use. To increase
output by increasing the rate of capital fomution or by expanding
the total labour force or by a serious effort to increase the rate of

THE VESTED INTEREST IN OUTPUT I47

technological innovation was no more in die minds of liberals (or
others) than now.^ Most important of all, the loss of production as
the result of depressions was not peculiarly a liberal concern. No one
was deeply committed politically on this problem; conservatives had
an equal interest with liberals in ‘smoothing out’ the business cycle.
During the decade of the twenties the political leadership in discus-
sion of possible means to mitigate the business cycle was assumed by
Herbert Hoover.

The classical programme of American liberals, until the decade of
die thirties, sought the redistribution of the existing income, greater
economic security, and the protection of the liberties and immunities
of individuals and organizations in face of the highly unequal distri-
bution of economic power. The progressive income tax; the develop-
ment of government services; the protection of public resources from
private appropriation; the extensions of social security; aid to farmers
or other especially disadvantaged groups; the strengdiening of trade
unions; and the regulation of corporations all served these ends.
None of these measures was thought much to affect the total output
of the economy.

All this changed very much during the decade of die thirties. The
Great Depression brought production to a very low level. Between
1929 and 1933 the gross output of the private economy dropped by
between a third and a half. The sheer magnitude of diis movement
focused attention, as never before, on movements in the total output
of the economy and on their far-reaching consequences for economic
and political fortune. CharactcristicaUy, to increase production was
less central to men’s thoughts than to reduce unemployment. ‘Our
greatest primary task is to put people back to work’, Roosevelt said
in his first inaugural. But whether directly or as a by-product of the
effort to reduce economic insecurity, expanded production began to
acquire a growing significance to political liberalism in its American
sense.

Then in 1936 came John Maynard Keynes. In the Keynesian system
the notion of an aggregate demand for the output of the economy
which determined the total production of the economy was central.
Depending on various factors, production might find its equilibrium

^ See page 102.

THE AFFLUENT SOCIETY

148

at a high level or a low one. There was no immutable tendency for it
to settle at the particular level where all willing workers had a chance
for employment. And by manipulating the level of aggregate
demand— die most obvious devices were to add to demand by
government spending in excess of taxation, or to subtract &om it by
taxation in excess of spending— the government could influence the
level of production.

The rewards flrom a successful operation on the level of output
were breathtaking. To increase production was to ameliorate unem-
ployment, agricultural insecurity, the threat of bankruptcy to the
small businessman, the risks of investors, the financial troubles of the
states and cities, even the wretched ovcrcrowdmg which results when
people cannot afford to own or rent their own homes and must
double up. Scarcely a single social problem was left untouched. And
within a few yean after Keynes die level of production became the
critical factor in war mobilization. It was principally by increased
output (pages 133-5) tb'it we provided for the war.

As a result, production did more than impress the Uberal. It became
his programme, and it established something akin to a monopoly
over his mind. Here was perhaps the nearest thing to alchemy that
had ever been seen in the field of politics. Increased production
solved, or seemed to solve, nearly all of the social problems of
the day.

Furthermore, at least for a time, the practical concern for the total
output of the economy was a Hbcral franchise. Conservatives hesi-
tated to abandon the balanced budget, for so long a canon of the
conventional wisdom.^ To do so was essential. To manipulate the
level of production also meant that the role of government must be
enlarged. This too was impalatable to conservatives, for it accorded
a prestige to government which had previously been accorded ex-
clusively to private production.

Most important of all for its influence on the liberal mind, the
promise to raise production and reduce unemployment won elec-
tions. From the late thirties to the early fifties ^e promise to main-
tain high production and therewith high employment was the Hberal’s

^Although numerous liberals, including unquestionably Roosevelt himself,
were also reluctant. And some chose to become conservatives on the issue.

THE VESTED INTEREST IN OUTPUT I49

major claim to votes in die United States, and it was unbeatable.
Very nearly die same thing was true of the left in Britain.

Liberal economic policy is still deeply preoccupied with produc-
tion. As memories of the underproduction of the depression years
have faded somewhat, the slogans have ceased to emphasize full
employment and have come to stress the expanding economy. Plat-
forms, manifestoes, and speeches develop the vision of a growing,
ever more productive America. ‘ We have the resources and machines,
the science and skills to expand production and consumption at an
accelerating rate, even relative to our rapidly growing population.
But we are not seizing boldly this historic opportunity.’^ The econo-
mic creed of American liberalism is more production. This, it should
be noted, is aggregate output. The question of the distribution of the
product so produced— who gets it— is decidedly secondary. To be
overly concerned with it is to seem a trifle old-fashioned. There is
almost no concern at all over the kinds of private goods and services
that are produced. All are important and the total counts.

IV

The preoccupation of the American liberal with production, it may
be observed in passing, is an interesting example of the hold of the
conventional wisdom in face of changing circumstances. In die two
decades and slighdy more since Keynes’ General Theory conserva-
tives, save on the extreme right, have swallowed their distaste for the
measures diat the Keynesian programme requires and have impliddy
adopted it. Neither the Eisoihower Administration in the United
States nor the Conservative ministries of Churchill, Eden, and
Macmillan in Britain were less committed in principle to full em-
ployment and economic expansion than their Democratic or Labour
opposition. Had it been thought otherwise they could not have won
office.

Moreover, die strategic position of conservatives, especially in the
United States, is in some respects stronger in relation to this policy
than that of liberals. Should it prove possible to maintain full em-

^ From die introduction to ‘Consumption— Key to Full Prosperity’ by the
Conference on Economic Progress, 1957, as printed in ADA World, May 1957.

150

THE AFFLUENT SOCIETY

ployment for a considerable number of years, people will eventually
forget to whom they arc indebted for originating the policy. They
will cease to be impressed by the liberal claim to a patent on full
employment policies. Producers will come to seem the natural
custodians of production. Conservative businessmen, notUberal poli-
ticians, will have the natural claim to oiHce on this platform.

There is anotlicr curiosity of the hberal position. The issue on
which he won during the thirties and which continued to bring him
victories for another decade was the promise of the increased pro-
duction that eliminated imemployment. This was something of
massive importance. But having discovered production, he has re-
mained with it. He has continued to stress the importance of the
increased output in periods when that involved not the eUmination of
unemployment but the increase in output of the already employed.
He has believed, in brief, that increased production remains the
touchstone of political success even when it involves additions to an
already opulent supply of goods. Between increases in production
that cure widespread unemployment and increases in production that
add to affluence, there is a difference not in degree but in kind. In
continuing to emphasize production, Hberals, who once had a great
issue, have without realizing it come to possess no issue at all. Yet this
is not surprising. No less than any others, Hberals accept the elaborate
rationalization by which we persuade ourselves of the continued
urgency of additions to our stock of consumers’ goods.

Nor is there Hkely to be any change in the Hberal position in the
near future. Few things arc so immutable as the addiction ofpoHtical
groups to die ideas by which they have once won office. Conserva-
tives can be reasonably assured of the continuing of unavowed sup-
port of their opposition. Businessmen who depend for their position
and prestige, and also for a goodly share of their poHdeal power, on
the prestige of production will find that prestige eloquendy attested
by Hberal manifestoes. The National Association of Manufacturers
should make a token contribution to the treasury of the Americans
for Democratic Action.

However, this is a digression. For present purposes we need only
observe that Keynes concentrated ffie eyes of Hberals on produc-
tion, and their poHtical successes gave them a vested interest in it.

THE VESTED INTEREST IN OUTPUT I5I

Keynesian attitudes became, as ever, the new conventional wisdom.
The liberal reaction to any questioning of the role we presently assign
to production will, one imagines, be little less outraged than that of
producers.

V

Browning observed that ‘Jove strikes the Titans down, not when
they set about their motmtain-piling but when another rock would
crown their work*. The position of our present economic goals could
scarcely look more secure. Is there a chance, none the less, that this is
their moment of weakness?

That the security of our present preoccupation widi production
qua production is formidable there can be no doubt. It has inherited
the concern once felt for cquaUty. It is powerfully reinforced by the
service it renders to economic security. It is rationalized by an elabor-
ate and traditional, even if meretricious, theory of consumer demand.
It has the sacred support of national security even though the relation
may in fact add to our peril. For businessmen production means
prestige. For Uberal poHticians it is thought to mean pubUc oflTice.

Yet the goals may not be impregnable. There may well be some
cracks in the facade. How significant they arc no one can guess. But
they arc worth remarking.

The prestige of production depends on the prestige of goods. In
the more censorious social levels of American society there is already
a well-developed and even ^hionable aversion to gadgetry. (The
word gadget is itself a pejorative term for durable goods.) In such
circles shiny rumpus rooms, imaginative barbecue pits, expansive
television screens, and magnificent cars no longer win acclaim. They
may even invite mild social obloquy. A degree of shabbiness in per-
sonal attire is now occasionally sought, especially amot^ males. We
have here what could be an indpimt revolt gainst goods or at least
a refusal to allow competitive emulation to be the source of wants.

Even more suggestive is the belief of the businessman that his
position in the co mmuni ty is slipping. This is reflected in the recur-
rent complaints that the coimtry does not appreciate the problems of
the business executive, does not suffidendy accept liis advice and
leadership, and that business is not ‘selling itself’ to the American

152

THE AFFLUENT SOCIETY

people. This latter is also, and perhaps more immediately, related to
the fear of unpleasant or inimical tax or regulatory legislation or the
drift toward ‘socialism’. But even that implies that the country is
insufficiently willing to accept the leadership and respect the warn-
ings of businessmen. Neither Carnegie nor the elder Morgan thought
it necessary to make such complaints.

Equally suggestive, the businessman who is seriously in search of
public esteem must now show that he is something more than a
producer of goods.

The rise of die public relations industry, which draws its clientele
overwhelmingly from among business executives, shows that busi-
ness achievement is no longer of itself a source of acclaim. At a mini-
mum the achievement must be advertised. But the first task of the
public relations man, on taking over a business client, is to ‘re-
engineer’ liis image to include something besides the production of
goods. His subject must be a statesman, a patron of education, or a
civic force. Increasingly some artistic or intellectual facet must be
foiuid. A businessman who reads Business Week is lost to fame. One
who reads Proust is marked for greatness.

These added requirements for esteem are unquestionably related
to changing attitudes toward goods. In the early years of 'the car age
it was sufficient for Henry Ford or R. E. Olds that they were makers
of cars. What indeed could be a source of more acclaim? Now the
car has become commonplace. And in the more recherche attitudes, it
is even big, ungainly, and unfunctional in its shape and decoration.
It is easy to see why the modem car manufacturer does not enjoy the
eminence of a Ford or an Olds.

As noted, the intellectual, along with tlie public official and poli-
tician, is the natural competitor of the businessman for what may be
called the solemn acclaim of the community.^ (Neither competes
with Hollywood, baseball, television commentaton, or cafe society
for what botii ^ree is the frivolous applause of the community.) In
fact the position of the intellectual is almost certainly more secure
than that of the businessman. It would hardly occur to a successful
poet or scientist to hire a public relations man, just as it would scarcely

* For a roughly similar conclusion see Russell Lynes, A Sutfeit of Honey (New
York, Harper, 1957).

THE VESTED INTEREST IN OUTPUT 153

seem wise for a successful coiporation president to do without one.
Although the businessman must, increasingly, show diat he is at
home with ideas, it does not occur to the philosopher or artist that he
should show that he is a good businessman. Perhaps most suggestive
of all, American intellectuals long ago created what amounts to a
second-class citizenship for the intellectual efforts of the business
executive. They listen to his speeches, review his books, and receive
liis ideas with respectful attention. But diey do not judge them to be
good or bad in themselves. They are good (or on occasion bad) for a
businessman. It is well understood that this is a much lower standard.

In Gabriel ChevaUier's Clochenterle the cure was by no means the
leading figure in the village by the more ostensible standards of that
agreeable community. He was a competent but not a brilliant
drinker; he was prevented by the cloth from displaying the amorous
enterprise by which the community set such store. But his ultimate
triumph was complete, for he alone held the keys to heaven. In the
United States no business executive has arrived imtil, on one sunny
summer morning, he walks in procession with the right combination
of solemnity and relaxed amiability and receives a reputable honor-
ary degree.

Still these are no more tlian straws in the wind. The miracle is still
the prestige that we associate with production and therewith with
producers. Nothing could be more remarkable than the beliefs and
the illusions which have kept it intact since Ricardo. In doubting its
supreme power we are challenging a phenomenon that is still of
heroic proportions.

CHAPTER FOURTEEN

The Bill Collector Cometh

The situation is this. Production for the sake of tlic goods produced
is no longer very urgent. The significance of marginal increments (or
decrements) in die supply of goods is shght. We sustain a sense of
urgency only because of attitudes that trace to the world not of today
but into which economics was bom. These are reinforced by an un-
tenable theory of consumer demand, an obsolete, erroneous, and
even somewhat dangerous identification of production with military
power, and by a system of vested interests which marries both liberals
and conservatives to the importance of production.

At the same time production does remain important and urgent
for its effect on economic security. When men arc unemployed,
society does not miss the goods they do not produce. The loss here is
marginal. But the men who are without work do miss the income
they no longer earn. Here the effect is not marginal. It involves all or
a large share of the men’s earnings and hence all or a large share of
what they are able to buy. And, we note, high and stable production
is the broad foundation of the economic security of virtually every
other group— -of farmers, white-collar workers, and both large busi-
nessmen and small. The depression also remains the major uncovered
risk of the modem large corporation. It is for reasons of economic
security that we must produce at capacity.

These simple conclusions will not be well regarded by the con-
ventional wisdom. To urge the importance of production because of
its bearing on economic security, and to suggest that the product is
in any way incidental, is disturbing. It brings the economic society to
the brink of the dubious world of make-work and boondoggling.

154

THE BILL COLLECTOR COMETH

155

One of the escapes from this world is to make all wants urgent, and
no doubt we have here another reason for the obscurantist ration-
alization of consumer demand. It still seems more satisfactory to say
tliat we need the goods than to stress the real point which is that
social well-being and contentment require that we have enough pro-
duction to provide income to the willing labour force. But if anyone
has surviving doubts as to where the real priorities lie, let him apply
a simple test. Let him assume that a President, or other candidate for
re-election to major public office, has the opportunity of defimding
a large increase in man-hour productivity wliich has been divided
equally between greatly increased total output and greatly increased
unemployment. And let it be assiuncd diat as an alternative he might
choose imchanged productivity which has left everyone employed.
That full employment is more desirable than increased production
combined with unemployment would be clear alike to the most
sophisticated and the most primitive pohtician.

The foregoing provides the basic rule of procedure for the re-
mainder of tliis essay. It shows that we need not be much concerned
with the supply of goods for their own sake. The urgencies here are
foimdcd not on substance but on myth. And, indeed, our ultimate
purpose is to see the opportunities that emerge as this myth is dis-
pelled. But in all this we must be exceedingly conscious of the impor-
tance of production for its bearing on the economic security of
individuals. As a source of income for people its importance remains
undiminished. This function of production must be carefully safe-
guarded.

But myth is rarely benign. And the system of illusions which
causes us to attach sudi importance to production for its own sake is
itself damaging or dangerous. One danger arises in the devices by
which we fabricate wants and this, indeed, nurtures a threat to the
security of employment and income which production provides.
Our fiiilure to solve the problem of inflation is also the result of
present attitudes toward the production of goods. And the way that
present attitudes cause us to emphasize the supply of some as distinct
from all goods and services is the source of deeper social dangers. To
these problems, beginning with the dangers inherent in the presoit
methods of manufiictunng wants, the essay now turns.

156

THE AFFLUENT SOCIETY

II

The immediate danger in the way wants are now created lies in the
related process of debt creation. Consumer demand thus comes to
dqiend more and more on the ability and willingness of consumers
to incur debt. And there are aspects of this debt creation which are
inherently unstable.

An increase in consumer debt is all but implicit in the process by
which wants are now syndiesized. Advertising and emulation, die
two dependent sources of desire, work across the society. They oper-
ate on those who can afford and those who cannot. With those who
lack the current means it is a brief and obvious step from stimulating
their desire by advertising to making it effective in die market with
a loan. The relation of emulation to indebtedness is even more direct.
Every community contains individuals widi a wide range of differ-
ence in ability to pay. The example of those who can pay bears
immediately on those who cannot. They must incur debt if dicy are
to keep abreast. The great increase in consumer indebtedness in our
time has been widely viewed as reflecting some original or unique
change in popular attitudes or behaviour. People have changed their
view of debt. Thus there has been an inexplicable but very real
retreat from the Puritan canon that required an individual to save
fust and enjoy later. In fact, as always, the pieces of economic Ufc are
parts of a whole. It would be surprising indeed if a society that is pre-
pared to spend thousands of millions to persuade people of their
wants were to fail to take the further step of financing these wants,
and were it not then to go on to persuade people of the ease and
desirability of incurring debt to make these wants eflective. This has
happened. The process of persuading people to incur debt, and the
arrangements for them to do so, are as mudi a part of modem pro-
duction as the making of the goods and the nurtuiii^ of the wants.
The Puritan ethos was not abandoned. It was merely overwhelmed
by the massive power of modem merchandising.

Viewing this process as a whole, we should expect that every in-
crease in consumption wiU bring a further increase— possibly a more
than proportional one— in consumer debt. Our march to higher

THB BILL COLLECTOR COMETH I57

living standards will be paced, as a matter of necessity, by an ever
deeper plui^e into debt. The evidence is already impressive. The
increase in living standards in the twmties was accompanied by a
relatively much greater increase in comumer bo^wing. The same
was true during the years of recovery in die thirties. It has been most
spectacu larly the case since World War II. In the five years from the
end of 1952 to the end of 1956 total consume debt (not including
real-estate loans) increased from $27*4 thousand million to $41*7
thousand million or by 53 per cent. Instalment credit increased by
63 per crat and that for cars by nearly a hundred per cent. Although
these were years of high prosperity, disposable income of individuals
increased by only about 21 per cent.^ In 1955 one family in four of
those with incomes between $3,000 and $4,000 bought a car, and
69 per cent of those did so on credit. Of families with incomes
between $4,000 and $5,000, more than one in three bought a car in
that year, and 66 per cent did so on credit. Only among the families
with incomes in excess of $10,000 did the proportion of cash buyers
exceed the proportion of credit buyen. About 30 per cent of diose
who bought cars on credit in 1955 had bought their previous car the
same way and still had debt outstanding on that vdiicle.*

One wonders, inevitably, about the tensions associated with debt
creation on such a massive scale. The legacy of wants, which arc
themselves inspired, are the bills which descend like the winter snow
on those who are buying on the instalment plan. By millions of
hearths throughout the land it is knovm that when these harbingers
arrive the repossession man cannot be far behind. Can the bill col-
lector be the central figure in the good society?

In 1955 the median income of the American frmily before taxes
was $3,960. Of all frmilies within the income range from $3,000 to
$4,000, 48 per cent had instalment paymrats to meet. For nearly a
third of those the payments commanded more than a fifUi of the
family income before taxes. Among families in the next lower
bracket— with incomes from $2,000 to $3 ,000—42 per cent had pay-

^ Economic Indicators (Washington, U.S. Government Printing Office, June 1957).

* Hiese data are all from Consumer Instalment Credit, pt. I, vol. I, Crowds and
Import (Board of Governors of the Federal Reserve System, Washington, D.C,

1957).

THE AFFLUENT SOCIETY

158

ments to make. Of these in turn 42 per cent had committed at least
a fifth of their income for instalment payments, and one &mily in
nine surrendered 40 per cent or more of its income to the bill
collector.^ On the desirabUity of this cadi must dedde according to
his own values. But there are associated economic dangers which are
less subjective.

Ill

In a society where virtuosity in persuasion must keep pace with
virtuosity in production, one is tempted to wonder whether the fint
can for ever keep ahead of the second. For while production does not
clearly contain within itself die seeds of its own disintegradon, per-
suasion may. On some not distant day, the voice of each individual
seller may well be lost in the collective roar of all together. Like
injunctions to virtue and warnings of socialism, advertising will beat
helplessly on ears that have been conditioned by previous assault to
utter immunity. Diminishing returns will have operated to the point
where the marginal efiect of outlays for every kind of commerdal
persuasion will have brought the average effect to zero. It will be
worth no one's while to speak, for since all speak none can hear.
Silence, interrupted perhaps by brief, demoniacal, outbursts of sales-
manship, will ensue.

Were this heroic eventuality to occur, there would, imguestion-
ably, be some interesting problems of economic readjustment. There
would be a coimterpart increase in consumer saving as the unper-
suaded allowed their bank balances to grow and repaid their debts.
Unless these increased savings were speedily offset by increased out-
lays elsewhere— and the day on which die massed voices of die
advertisers bring total cancellation of efiect will not be one of
supreme business confidence and burgeoning investment spending—
the result would be a decline in total spending and, therewith, in the
total output of the economy. The further and more painful conse-
quence would be an increase in unemployment and a reduction in
other incomes— in brief, a serious curtailment of the social security
of which production has become the servant.*

* Ibid., p. no.

* In the conventional wisdom, just as there has been hesitation in stressing the
role of advertising and salesmanship in want creation so there has been litde ten-

THE BILL COLLECTOR COMETH I59

The less imaginative dangen arise in connection with consumer
borrowing. Here trouble is already foreseeable. Indeed, it has already
beoi accorded a degree of recognition in the conventional wisdom
which has taken the usual form of assurances that there are no
grounds for concern.

As we expand debt in the process of want creation, we come neces-
sarily to depend on this expansion. An interruption in the increase in
debt means an actual reduction in demand for goods. Debt can be
expanded by measures which, in the nature of the case, cannot be
indefinitely continued. Periods for payment can be lengthened,
although eventually there comes a point when they exceed die life
of the asset which serves as the collateral. Down payments can be
reduced, but eventually there comes a point when the borrower’s
equity is so small that he finds it more convenient to allow reposses-
sion than to pay a burdensome debt. Poorer and poorer credit risks
can be accommodated, but at last it becomes necessary to exclude the
borrower who, as a matter of principle, does not choose to pay.

hi 1955, a year of especially urgent persuasion in the car market,
the average repayment period on car instalment contracts was
lengdiened firom an estimated average of 24*5 months in 1954 to
28 months. The average down payment remained the same in the
fiice of a substantial increase in the average retail price of cars pur-
chased, and the average credit granted per instalment sale increased
from $1,960 to $2,240.^ During 1955 the total volume of car instal-
ment credit outstanding increased by $3*6 thousand million.

This was a trend that could not be sustained. Although there was
some further easing of terms the following year, the rate of increase
in the volume of loans subsided. The result was a marked reduction in
sales of cars — ^firom 7*9 million passenger vehicles in 1955 to 5*8
million in 1956 — and in face of a continued increase in disposable
income of consumen. Car centres experienced a perceptible amount
of unemployment in a period of general prosperity.

dency to explore our dependence on such persuasion. An esrception is Paul Mazur
whose book The Standards we Raise (New York, Harper, 1953) has a forthright
philistinism that, while it doubdess cost him scholarly attention, brought him
refieshingly dose to the modem role of advertising and related activities.

* The Standards we Raise, p. 128.

l60 THE AFFLUENT SOCIETY

This experience shows what could occur on a much wider canvas
and with more serious consequences. No one can speak with con-
fidence on the extent of the danger. However, few things are more
satisfactorily established in economics than that debt creation,
whether by producers or consumers, is a major source of uncertainty
in economic behaviour. It has anciently been recognized that times
of high income and employment and a generally sanguine outlook
are oicouraging to both borrowers and lenders. The spending that
results from these transactions adds to die general total of purchasing
power when, in effect, it is least needed. Under less sanguine circum-
stances loans are advanced more cautiously. Instead of spending from
new loans, there is repayment of old ones and this, as perversely as in
prosperity, occurs at the least propitious time.

Borrowing, in the past, has been mainly by business firms for
investment. For this reason business spending was regarded as the
most mercurial of die three major categories of spending. Outlays
by consumers and by government were, by contrast, regarded as
comparatively reliable. ‘There is . . . general agreement that [general
fluctuations in employment] show themselves predominandy in
swings in the demand for labour for investment— chiefly for invest-
ment in works of construction.’* ‘. . . movements in income, output,
and employment are mainly characterized by fluctuations in the rate
of real investment. Moreover, consumption rises or falls, in large
part, in response to real investment.’* The effect of the expansion of
consumer credit is to add an uncertainty, paralleling that which busi-
ness borrowing brings to business spen^g, to the hitherto more
reliable consumer spending. The instability may be greater, for the
terms of consumer credit will be cased— down payments reduced
and repayment periods lengthened— as an aspect of competitive
merchandising techniques. In the case of business investment this is
less likely to occur.

In any case consumers will add the most spending from borrowed

* A. C. Pigou, Itiame (London, Macmillan, 1946), pp. 89-90.

* Alvin H. Mansen, Business Cycles and National Income (New York, Norton,
I95i)> p- 17* Professor Hansen goes on to observe that consumer’s durables,
including motor-can, can be an original source of fluctuation. These arc the
consumer products principally associated with debt creation.

THE BILL COLLECTOR COMETH

l6l

funds to their spending from current income during the period when
it is least needed. This will exaggerate inflationaiy pressures. And
it is plain that a frmily that has committed 40 or even 20 per
cent of its income to instalment payments will have to cut its current
spending appreciably if one or more of its income earners lose their
jobs. Thus an increase in unemployment, accompanied by the fear
that it might get worse, could induce a general effort to avoid new
debt and reduce the old. The further effect on consumer spending,
thereafter on employment, and thence once again in reducing bor-
rowing and magnif^g efforts to meet debts, could be considerable
and disagreeable.

IV

By virtue of position, certain individuals in our society are accorded
the privilege of stating as fact what, in the nature of things, is un-
knowable. The tycoon and college president have well-recognized
rights along these lines. Any candidate for public office may distin-
guish with clarity between actions which will lead to unUmited
prosperity and those which will lead to utter ruin. Secretaries of
State may tell us by which actions our lives and Uberties will be pre-
served to near eternity and by which they and we will be destroyed.
In all instances those privileged as prophets are permitted to identify
salvation with the action whicli at the moment they find most
expedient. To a remarkable extent, considering dieir much more
humble status, economists are allowed to tell what present trends in
society wiU culminate in deep trouble and distress. In consequence, it
would be entirely permissible to foresee the gravest results from the
way consumer demand is now sustained by the rdmtless increase in
consumer debt.

In the course of its study of consumer credit in 1956, the Board of
Governors of the Federal Reserve System concluded that while
‘relatively little is known about the safrty margins in the finances of
consumers who borrow on a short-term and intermediate-term
instalment basis ... the evidence of a trend over past decades toward
more liberal terms suggests that these margins are less than in earlier
years’. Then, without throwing caution to the winds, it warned that
‘the possibility of an episode of drastic and spiralling liquidation [of

i 62

THE AFFLUENT SOCIETY

this credit] should not be dismissed’. Thereafter, for purposes of
practical action it did dismiss it.

In fact we do not really know the extent of the danger. A tendency
to liquidation of consumer debt, with accompanying contraction in
current spendmg, could be offset by prompt and vigorous govern-
ment action to cut taxes, increase public outlays, and so compensate
with spending from other sources. On the other hand, such measures
are subject to both psychological and procedural delays. Nothing in
our economic policy is so deeply ingrained, and so little reckoned
with by economists, as our tendency to wait and sec if tilings do not
improve by themselves. In a time of receding income die income tax
reduces itself automatically. Social security, &m and other payments
have a similarly automatic tendency to expand. But taxation and
expenditure beyond the range of these automatic stabilizers require
Executive and Congressional action. Such decisions and action could
be in a radically slower tempo from that of debt liquidation and the
consequent slump in spending.

V

In a society in which the production and sale of goods seems sacro-
sanct there will be extreme hesitation over measures which will seem
to restrain the financing of consumers’ goods and hence their sale.
Measures to prevent the competitive liberalization of consumer
credit terms will encovmter the heaviest resistance. When regarded in
relation to the underlying interest in stability and economic security,
such precautionary measures have a much stronger claim for atten-
tion. They promise to help keep the process of synthesizing demand
and the purchasing power to make it effective from damaging the
continuity of production and employment. The regulation of the
terms and conditions of consumer credit, while it has been under-
taken in the past in wartime, is not a power presently possessed by the
United States government. It is, however, a commonplace in the
United Kingdom.

However, the more substantial remedy lies deeper. Not all goods
and services are subject to sale on die instalment plan and to the
attentions of the bill collector. Cars and radios and wall-to-wall

THE BILL COLLECTOR COMETH

163

carpeting are; the services of the schools, hospitals, and public
libraries are not. To the extent that an economy concentrates its
efforts on the first it will be subject to the vagaries of want-cw/w-debt
creation. As it devotes its energies to serving itself with health, educa-
tion, and otlier like services, it will reduce its danger. We have
already seen that die preoccupation with production is a selective
one. In particular it is heavily centred on those goods which by their
cliaractcr or by tradition are in the domain of private production. It
concentrates energies, in other words, on producing the products
which are subject to the greatest instability. It carries this indeed to
the point where die manufacture of wants may itself be a tenuous
process. A different arrangement for satisfying our needs— one, for
example, that allotted a larger proportion of resources to those needs
that are in the public domain— would thus be an important step
toward stability. In one of the paradoxes widi which economics is
replete it might even, by contributing to the reliability of production,
ensure a greater total private product.

However, once again this is to run aliead of the story. We are
concerned for the moment only with the tensions and die dangers of
a society in which the pursuit of goods is paramount and wliich does
not pause to reflect on the devices— mass persuasion leading on to
mass encouragement to indebtedness— wliich further the chase. We
now turn to another of the tensions of diis society.

CHAPTER FIFTEEN

Injiation

Through most of man’s history the counterpart of war, civil dis-
order, famine, or other cosmic disaster has been inflation. In recent
times inflation has acquired new habits: it persists in periods of peace
and high and rising prosperity. This tendency has been strongly mani-
fest in the United States and especially in the decade and more follow-
ing World War II. In these years the prices of a large range of indus-
trial products— steel and steel products, machinery, machine tools,
farm equipment, many non-ferrous metals and their products—
moved steadily upward. Steel prices, in the mid-fifties, were increas-
ing at a rate sufficient to double their level every decade. In some
years, 1955 and 1956 for example, new high levels of living costs
were posted month after month with monotonous regularity.

The public response to this recurrent inflation has been interesting.
It has been widely deplored and condenmed. Politicians of both
parties have taken a strong position against it. Conservatives,
anciently the selfdesignated custodians of the ‘honest dollar’, have
continued to stress this tenet of their faith. Businessmen, bankers,
iiuurance executives, and nearly every type of professional public
spokesman at one time or another have warned of the dangers of
continued inflation. Meanwhile liberals have deplored failure to take
efi^tive action while proposing none themselves. Next only to the
virtues of competition, tliere is nothing on which the conventional
wisdom is more completely agreed than on the importance of stable
prices. Yet this conviction leads to remarkably little effort and,
indeed, to remarkably few suggestions for specific action. Where
inflation is concerned nearly everyone finds it convenient to confine

164

INFLATION

165

himself to conversation. All branches of the conventional wisdom
are equally agreed on the undesirability of any remedies that are
effective.

II

There are several reasons for this barren position. First, to be sure
some reap material benefit fiom inflation. They too oppose it, for
reasons of respectability, but their opposition is less than impassioned.
Of importance also is the influence of inaction— or postponement—
as a policy. This docs not reflect mere negativism, as is often supposed
and even more frequently charged. As noted, in die nineteenth cen-
tury model of the competitive society, a rhythmic sequence of expan-
sion and contraction in economic activity was assumed. The expan-
sion was accompanied by rising prices; in the contracting phase these
gave way to filling prices. The movements in cither direction were
thought to be self-limiting. Thus if prices were rising one had only to
wait. Presendy they would reverse themselves and begin to fall.

In the course of time confidence in the self-limiting character of
these movements was seriously weakened. This was especially true
as regards die period of contraction or depression, and the Great
Depression dealt a decisive blow. Although as late as the early thirties
it was a tenet of the conventional wisdom that in depressions the only
appropriate course of action was a severe ‘hands-off’ policy, govern-
ment intervention against depression is now regarded as inevitable.

However, there was never any equally dramatic assault on the
older confidence that rising prices and inflation would cure them-
selves. Keynes led the attack on the conviction that depressions were
sclf<orrecting by picturing the possibility, indeed the probability,
that the economy would find its equilibrium with an unspecified
amount of unemployment. Dozens seized his point and sought to
penuade the politicians and the public. The notion that, in peace-
time, prices might as a normal thing rise continuously and persistently
has had no Keynes.

Thus the conviction, or more precisely the hope, has remained
that peacetime inflation might somehow be self-correcting. This is
not a hope in which even conservatives repose very great confidence.
But in combination with the belief, so common in recent years, that

l66

THE AFFLUENT SOCIETY

the behaviour of the economic system is bound to be ^vourable if
only earnest and God-fearing men are in command of its destinies, it
provides a strong reason for always waiting to sec if prices won’t turn
down by themselves. Even liberals, who are required to advocate
although not to specify action to prevent inflation, are in practice
likely to be tempted to wait and see.

This disposition to inaction is reinforced by the belief, of strong if
diminishing influence ever since the thirties, that the most grievous
threat to the American economy is a depression. If this danger lurks,
however obscurely, around the comer, then there is all the less reason
to act to control inflation. For inflation may any day come to an end
in the thunder of economic collapse or tire lesser misery of a few
million unemployed. These eventualities are much more grave than
rising prices. We are especially hesitant, knowingly at least, to invoke
measures which might precipitate them. Some inflation remedies
miglit do so or, at any rate, be blamed.

However, the forces which act to make inflation a peculiarly un-
manageable problem in our time arc embedded much more deeply
in the fabric of our social Ufc. We are impelled, for reasons of econo-
mic security, to operate the economy at a level of output where it is
not stable— where persistent advances in prices are not only probable
but normal The remedies that would be effective collide witli the
urgencies of production for purposes of economic security. Or they
are in conflict with attitudes which emphasize die importance of
economic growdi and of unhampered markets for the efficient use of
resources. This conflict has been further complicated by what is in
part a belief, in part a hope, and in part a faith that the conflict can be
evaded. The means to this evasion is the manipulation of the mone-
tary supply— what economists have come to call monetary policy.

We shall look fint at the nature of inflation and its consequences
and then, in the next chapter, at the hope, never so strong as in recent
times, that the conflicts which it presents might somehow be elided
by monetary policy. Then we shall examine the unresolved conflict
between the other remedies and the store we set by economic
security and also by economic growdi and unhampered markets.

INFLATION

167

III

Inflation— persistently rising prices— is obviously a phenomenon of
comparatively high production. It can occur only when the demands
on the economy are somewhere near the capacity of die plant and
available labour force^ to supply them.® When supply cannot be
readily increased, as will be the case at capacity production, further
increases in demand are capable of bringing price increases. A dis-
tinction must be made between two parts of the economy. In diat
part of the economy where, as with agriculture, there are many pro-
ducers and an approach to what economists term pure competition,
no individual seller controls or influences prices. There prices will
move up automatically in response to the increased demand. In die
typical industrial market— steel, machinery, oil, cars, most non-
ferrous metals, chemicals— a relatively small number of large firms

^ Capacity use of plant may be defined as that point where any further increase
will incur abruptly rising short-run marginal costs. These costs will be above die
long-run costs after plant expansion. Full employment or full use of the labour
force may be defined as the point where, similarly, additional labour effort is
forthcoming only at steeply rising marginal cost. In the ensuing chapters I speak
jointly of the capacity of plant and the labour force. In any given situation one or
the other can be the limiting factor and the source of the rising marginal costs.

® I have written a good deal— more, I suppose, than on any other economic
subject— on various aspects of the inflation problem, and I am concerned to avoid
repeating myself unnecessarily here. I have dealt with inflation in the general
context of big firms and unions in the final chapters of American Capitalism: The
Concept of Countervailing Power, The dieorctical implications of the coexistence of
competitive and oligopolistic market structures and the absence of full short-run
maximization by the latter are developed in ‘Market Structure and Stabilization
Policy’, Review of Economics and Statistics (Cambridge, Mass., May 1957), and
summarized in non-teclinical form in a statement prepared for the Sub-committee
on Antitrust and Monopoly, Committee on the Judiciary, of die United States
Senate (Hearings, ]viy ii, 1957)* My views on the inflation problem have changed
(and I tnist developed) over the years. In particular 1 regard the ensuing statement
of the causes of inflation, though similar in broad contour, to be somewhat more
precise than that in American Capitalism. The point of departure that inflation is the
central problem of the economy of countervailing power is of course the same.
The years since 1952, when this book was published, have, I think, provided a
good deal of dismal verification of the point.

i68

THE AFFLUENT SOCIETY

enjoy, in one way or anodier, a considerable discretion in setting
prices. In diese markets— those characterized by what economists call
oligopoly— as capacity is approached it becomes possible and profit-
able to mark up prices. The fact that all firms are at or near capacity
is assurance that no firm, by holding back, will capture an increased
share of the market. It cannot supply it. Nor imder these circum-
stances is there danger that there will be extra stocks lurking around
at a lower price.

At this point it is necessary to foreclose on what is perhaps the
commonest error in contemporary attitudes toward inflation, al-
though die point is well understood by economists. This is the almost
inevitable temptation to regard increased production as a remedy for
inflation. It is the most natural of errors; the first thoughts on the
matter are wonderfully simple and forthright. If inflation is caused by
output pressing generally on capacity, dien one need only get more
capacity and more output and dius ensure that this tension no longer
exists. But as just a moment’s further thouglit will suggest, additional
all-round production, even when it can be readily obtained from
existing capacity, will pay out, in wages and other costs, the income
by whicli it is bought. Wc have seen, moreover, that wants do not
have an origin that is independent of production. They arc nurtured
by the same process by which production is increased. Accordingly,
the effect of increased production from existing plant capacity is to
increase also the purchasing power to buy that production and the
desires which ensiure that the purdiasing power will be used.

But there is worse to come. If production is at capacity, increased
output win naturally require an increase in capacity. The increased
investment that this implies will, in the form of wages, payments fi)r
materials, returns to capital and profits, add to purchasing power and
the current demand for goods. It does so before the added capacity
resulting from the investment is in place to meet the demand. Thus
die e&rt to increase production adds to the pressure on current
capacity— and to the prospect for inflationary price increases.

A cat chasing its own ^ may, by an extraordinary act of feline
dexterity, on occasion succeed in catching it. To overcome inflation
by increasing production, while superficially similar, will not so oftoi
be successful.

INFLATION

169

IV

The response of the economy, whoi it is operating at or near capa-
city, to an increase in demand vnll not be uniform for all industries.
As just observed in the competitive industries, i.e. those where prices
are set impersonally by the market, any increase in demand when
supply can no longer be readily expanded will, predictably, raise
prices. Similarly a reduction in demand will reduce prices. However,
in the characteristic industrial market— those of oligopoly and ad-
ministered prices— the increase in demand must be implemented by
a specific decision by the firm to change its price. This decision may
be delayed for a variety of reasons: inertia; the need to establish a
consensus on the extent of the increase imder circumstances where
the anti-trust laws forbid formal communication between firms; the
feat of an advene public reaction to the price advance; the fear that
over a longer span of time the price increases will be damaging to the
competitive position of the firm or industry; and the possibility of
attracting the attention of the union and stimulating wage demands
all may lead to delay. (It is worth repeating that this kind of price
behaviour can occur only in that part of the economy where pro-
ducen are sufficiently few and are otherwise so situated as to have
power over their own prices. Such behaviour is not vouchsafed to
the farmer or to the businessman who is one of many in the market.)
For many of the same reasons price increases, when they occur, will
not bring prices to the point where they maximize the short-run or
current returns of the company. It is in the long-run that the cor-
poration lives. It is the return over the fullness of time which is rele-
vant to managerial calculation. If the prices that maximize profits at
the moment will brii^ wage demands that will threaten the cost
position of the company over time; or if there promises to be long-
run danu^e to the competitive position of the company; or if the
public reputation will be hurt, than short-run maximization of
return does not accord with self-intorest even whoi ffiis is defined
in the narrowest of pecuniary terms.^ The firm will not proceed to

^It teems likely that many economists have been reluctant to concede the
possibility of sudh ‘lestiaint’ in pricing because it seemed to be in ccmflict with
selfmtetest hi &ct, no such forbearance need be involved.

G*

THE AFFLUENT SOCIETY

170

maxitnize its current return unless something happens— an important
point— to make this possible without damaging the longer-run
interest.

Two things follow. In a period of hi^ and rising demand, short-
run possibihties for increasing prices are likely to run ahead of the
long-run assessment of where prices should be. Therefore, firms in
the typical industrial market are likely to have what amounts to a
reserve of unliquidated gains from unmade price advances. Unlike
the farmer or other competitive producer, who is effectively isolated
from any such opportunity, firms in these markets could exact higher
prices than they do. They will do so if circumstances so change as to
make short-run maximization more nearly consistent with the firm’s
view of its long-run interest.

As a result price increases in these industries are not tied tightly to
capacity operations or, as in competitive industries, to rising demand.
Demand in (say) the steel industry nuy &11 to something less than
capacity levels, but if there is an unUquidated gain, and something
alters the relation between short- and long-nm maximization so as to
make the former more feasible, prices will still be increased. As just
stated, this can happen when demand is falling. In the competitive
industries, output being given, prices will never go up except by
reason of an increase in demand. When demand falls, prices predict-
ably will faU.^

While prices in the administered price industries may rise in fiice of
some excess capacity and fall in &ce of falling demand, the scope for
such movements should not be exaggerated. Excess capacity, if it is
considerable, will increase the danger that some firm will f^ to go
along or, at a later date, resort to surreptitious price-cutting. These
dangers will act to oihance the doubts about the wisdom of raising
prices to maxiinizc short-run gains and increase the reluctance to do
so. There will be similar and perhaps stronger fear of the longer-run

^ These movements will be affected, also, by differential movements in demand
and also difierences in the rate at which different industries adapt their plant to
changes in demand. To stress the role of unliquidated gains— in the absence of
which one cannot satisfactorily explain the ability of industrial firms to respond as
they do to wage increase— is not to exdude these commonplace effects. Cf. the
article by Robert Solomon, ‘Galbraith on Market Structure and Economic
Stabilization Policy*, and my comment. Review of Economks and StatistUs, 1958.

INFLATION

I7I

consequences of such price increases when demand is falling. The
action may have to be reversed. Perhaps meanwhile wages will have
moved up partly because of the price increase. The important point
is only that in industries characterized by oligopoly the relation be-
tweoi demand, capacity, and price has a degree of play. Prices are not
restricted immediately demand is curbed or excess capacity appears.

In the inflation drama it remains only to introduce Hamlet. That, by
common consent, is the union. It is the instigator presumptive of that
most familiar of economic phenomena, the wage-price spiral.

The role of wages in relation to inflation has long been a trouble-
some matter for economists. Obviously wages have something to do
with price increases. Yet it is plain that a firm that advances its prices
after a wage increase could have done so before. At the previous
lower costs and the higher prices it would have made more money.
The wage increase did nothing to enable it to get the higher price.
An advance in steel wages adds only infinitesimally to the demand
for steel-mill products and only after a time. In any evoit this is not
something which steel firms take into consideration in their typically
prompt response to a wage increase.^

The explanation lies in the existence of the margin of unliquidated
gain and in the further fact that the wage advance, of itself, promptly
increases the opportunity for short-run maximization in relation to
long-run maximization. This is most obviously the case whoi the
firm has been unwilling to advance its prices becatise of fear that it
would attract the attention of the union which would press for wage
increases. Now the union’s attention has manifestly been attracted,
and there need no longer be any reluctance on diis score. The danger
of an adverse public reaction is also least at such times. The public will
ordinarily attribute the advance in prices to the union. In steel and
other industries, there is now a well-established policy of making the
occasion of a wage increase the opportunity for a rather larger
increase in prices and company revenues.

^ It is, of course, a part of die progressive eiqiansioa of money incomes which
sustains the iqdationary movement. But it is still true that the price increase pre«
cedes and ioa not follow die expansion in income.

172 THE AFFLUENT SOCIETY

This is the core of the rdation of wages to prices but not quite all
of it. It would be wrong to suggest that die initiative to the whole
movement lies with the wage demand of the unions. Living costs
rise, eroding the last wage gains and stimulating efforts to recoup.
And when demand and responding production are at capacity levek,
profits will ordinarily be good. These in turn act as the lodestone to
union demands. In the appropriate industries the unexploited oppor-
tunity for price increases can now be sdzed. So it goes. One cannot
single out a particular spoke in a wheel, paint it black (or red) and say
that it shoves aU the othen. However, its futility as a subject of social
controveny notwithstanding, nothing is more debated dian the
relative responsibility of workers and employers for the price ad-
vances which comprise inflation.

VI

As stated, the wage, price, and profit spiral originates in the part of
the economy where firms with a strong (or oligopolistic) market
position bargain with strong unions. These price movements work
themselves through the economy with a highly diverse effect on
different groups. Where firms are strong in their markets and unions
are effoctive, no one is much hurt, if at all, by inflation. Concern over
the problem will be marked by the fortitu^ with which we all are
able to contemplate the sorrows of others. Elsewhere the effoct will
be highly mixed. Those individuals and groups will suffer most who
have least control over their prices or wages and hence the least
capacity to protect themselves by increasing their own return. Or if
such control, as in the case of agriculture, is slight, thoi the effect will
dq>end on whether the income elasticity of the demand for the parti-
cular product— roughly the effect of increased incomes on the
demand for the product— is small or great. And something will
d^end also on whether the particular producer’s costs are a^cted
promptly or belatedly by the increase in prices.

Thus, by way of illustration, farmen have little or no control over
the prices at which they seU their products. Inflation reaches them by
way of impersonal market movements. For the wheat or potato
farmer the income elasticity is very low— as wage incomes rise

INFLATION

173

individuals spend no more for bread or potatoes, and for potatoes
there is indication that they spend less. Meanwhile the farmer’s costs
of fuel, fertilizer, and other factors firom the oligopolistic sector of the
economy vnll have risen. For the beefcattle producer, by contrast,
income elasticity is rather higher. He is die beneficiary of the well-
known and statistically quite demonstrable tendency of people who
have an increase in pay to celebrate with red meat. Other things
equal, and in the catde business they frequently are not, his position
will be happier than that of the producer of bread, grains or potatoes.

Such discrimination is pervasive. The individual or firm which,
either in line of business or as the result of speculative acumen, holds
large unhedged inventories, benefits from the increased demand for
these and firom the consequent increase in price.

At the other extreme are those who experience the rising costs but
whose own prices remain largely unaffected because they are fixed by
law or custom or, at a minimum, by someone else. This is the posi-
tion, during inflation, of the teacher, preacher, public servant, of
(in general) the salaried professional and white-collar community,
and of those who in effect are reaping the reward of past services to
society in the form of pensions or other such payments. The result of
rising costs and comparatively fixed returns for all of these groups is
much too familiar to require exegesis. Those on pensions sufler
severely. Those who depend for their pay on the public treasury are
also especially likely to sufler during motion. Like all others they
experience the increase in prices. Their income for a variety of
reasons is almost certain to lag. This lag is of considerable conse-
quence, and it is something to which this essay will return.

Not all vendors of professional services do suflfer. Occasional
groups have discretion over their prices and are able to tahe prompt
advantage of the general increase in money wages and demand, to
raise tiieir own charges and revenues. Lawyers and docton normally
fall in such a category. There are others. In 1942 a grateful and very
anxious citizenry rewarded its soldiers, sailors, and airmen with a
substantial increase in pay. In the teeming city of Honolulu, in
prompt response to this advance in wage income, the prostitutes
raised die prices of their services. This was at a time when, if any-
thing, increased volume was causing a reduction in dieir average un it

THE AFFLUENT SOCIETY

174

costs. However, in this instance the high military authorities, deeply
angered by what they deemed improper, immoral, and indecent
profiteering, ordered a return to the previous scale.

In a firec market, in an age of endemic inflation, it is unquestionably
more rewarding, in purely pecuniary terms, to be a speculator or a
prostitute than a teacher, preacher, or policeman. Such is what the
conventional wisdom calls the structure of incentives.

VII

In basic outline the requirements for inflation control will now be
clear. When the economy is at or near capacity, firms in the concen-
trated sector can advance their prices and will have inducement from
advancing wages to do so. Such price increases, widi dieir further
effects, will be prevented only if there is slack in the economy. Then
various restraints begin to operate on the price advances, on the
firms in granting wage advances, and on imions in asking for them.
But, since firms may have unliquidated gains when operating at
rather less than capacity, this slack in the absence of other measures
may have to be considerable. In the years following World War II,
prices continued to rise in much of die oligopolistic sector of the
economy; i.e. where strong unions bargained with strong firms right
through the recessions of 1949 and 1954. Prices as a whole were stable
only because those in the more competitive markets were falling.
While exceptional circumstances may intervene, we would certainly
be wise to expect inflation whenever demand is strong and rising and
imemployment is below, say, three or four million.

Were it possible to prevent wages from reacting on prices, and
vice versa, Aen it would be possible to have price stability with pro-
duction a good deal closer to current capacity and full employment.
Wage movements would not then serve as a reason for raising prices
and as a justification, or cover, for adding to profits. The derived
efl^ of these increases on other sectors would be eliminated. It
would thus be possible to have higher output and employment with-
out inflation.

In the past there has been much argument whether, in the strategy
of inflation control, one should seek to come to grips with the level

INFLATION

175

of demand (in relation to the capacity of the economy and the labour
force) or whether one should seek to deal with the wage-price spiral.
Economists have generally empliasized the importance of the level of
demand; to the layman the wage-price spiral has always seemed the
phenomenon that most obviously required attention. The proper
answer is that both are important. Inflation could be controlled by a
sufficiently heavy reduction in the level of demand. It could be con-
trolled with a less drastic reduction if something could be done to
arrest the interaction of wages and prices or, to speak more precisely,
of wages, profits, and prices.

The conflicts here will be evident. The introduction of slack,
especially if it must be considerable, is in conflict with the impera-
tives of economic security. And the use of controls is in conflict with
the ancient conviction that resources must be allocated efficiently
between their various employments and diat the free market is the
most efficient and possibly even die only satisfactory instrument of
such allocation. Setting the store that we do by the production of
goods, we have here a seemingly decisive argument against the use
of controls.

We shall have occasion to examine diis conflict more closely
in the next chapter but one. But first it is necessary to look at the
effort to avoid the conflict entirely by use of monetary policy.

CHAPTER SIXTEEN

*

The Monetary Illusion

In Britain throughout the nineteenth century the Bank of England
was able through the increase or decrease of the bank rate— in prin-
ciple the rate of interest at which it stood ready to lend money to
those who in turn were in the business of lading money— to have a
measinre of influence on the British banking and business life. The
circumstances were imdoubtedly favourable. The world was mostly
at peace. There were no restraints on the international movement of
capital funds; these were free to move anywhere in pursuit of a
higher return. An increase in the rate would bring funds from abroad
to take advantage of the higher earnings. A reduction would bring
borrowers instead. Thus the volume of bank reserves could be
influenced with some precision. The British economy of the last half
of the century was exposed by free trade to the competition of the
rest of the world. One can assume, as a result, that it was fairly sensi-
tive to higher interest costs which meant higher carrying charges for
new investment or to lower interest costs which bespoke a favour-
able opportunity for expansion. There is much room for debate on
the extent of the effect of the bank rate on the British economy—
how much investment was encour^ed or discouraged and to what
extent prices were inflated or deflated. Perhaps the bank rate was
credited with much that would have happoied anyway. Perhaps it
derived prestige from its position as a Victorian conversation piece.
But per^ps it was of consequence.

Vi^t is not in question is that the possibility of exercising such
control came to have a compelling charm for ^ who were in any
way identified with it. This was especially true of the banking com-

176

TUB MONETARY ILLUSION

177

mtuiity. For it meant that bankers, through tke central bank, stood
at the apex of economic influence. Their power, moreover, was not
won by the crude, uncouth, and uncertain process of soliciting votes.
It was die direct reward of financial achievement and wealth. Not
only did monetary policy belong to the banking community, but
specific steps were taken to safeguard the exercise of this authority
from the intervmtion or intercession of politicians. The central bank
was kept ‘independent’ of the government and in degree above it.
Such was the case for centuries with the Bank of England. It is still
so, nominally, of the Federal Reserve System. This independence,
though extensively celebrated in the conventional wisdom, would
not long sustain determined opposition to die wishes of the Execu-
tive and the Congress. But it reflects, in at least vestigial form, the
belief that monetary policy is the liighly professional prerogative of
the financial community. As such, it must be protected from the
crude pressures of democratic government.

The management of the economy by monetary mediods involved
the exercise of subde, as distinct from naked, power. No business-
man, or indeed no citizen, was told what to do. Instead they were
guided by forces of which they were themselves not wholly aware.
If the economy must be given guidance, how gratifying that it be
done in this discreet and seemly way.

Moreover, to most people money and credit, the way they are
conceived and extinguished, and die fact that pieces of paper of little
intrinsic worth can be so valuable, remain a great reservoir of mys-
tery. Decisions on monetary policy have always been taken in camera
and communicated to the public only by actions— movements in die
interest rate or increases or decreases in central bank portfolios. A
learned literature developed which was privy to the mystery and
which speculated on the motives behind various moves. Its authors
came to have a stake in the policy they interpreted. They belonged to
a select &w who understood. Outshining them, only, were those
who were privy and really knew. Such was the diarm of diis policy
that this aflection was easily translated into claims for its efl^veness
which, in fiict, did invade the supernatural. Monetary policy was
graced by effects not only mysterious but magical.

This has not invariably been so. In the nineteen-thirties the prestige

178 THE AFFLUENT SOCIETY

of monetary' policy was, for a time, very low. High interest rates had
failed miserably to arrest die speculative boom of the late twenties;
low rates were equally ineffective in dealing with the Great Depres-
sion. Bankers, in these years, as a result of error, unhappy accident,
and the enthusiastic denigration of left-wing critics, had suffered a
severe decline in popular esteem. Down with them went the faith in
monetary pohey. Keynes argued that the rate of interest was a round-
about way of influencing economic activity and of small practical
utility.

From tliis nadir, in the years following World War II monetary
policy had a great revival. Banks and bankers recovered their pres-
tige and so did the instrument with which they were so intimately
identified. Faith in monetary poHcy became a badge of resistance to
the heresies of Keynes and proof that the individual had no part in die
radicalism which sought to defiune decent and respectable men be-
cause they were in the business of holding and lending money.

More important, somediing liad to be done about inflation. The
odier measures for contending with this ineluctable phenomenon
were under the handicap of being unpalatable, impracticable, or un-
American. Tliis was the practical consequence of their being in con-
flict with other economic goals. Yet steps had to be taken. Monetary
policy remained the only hope. To die affection which the policy
elicited and the faith on which it was grounded was added a large
element of wishful thinking. There was nothing else, so it had to
work. Monetary policy became a form of economic escapism.
Without it the reaUties would indeed be hard.

Unhappily, fliith or urgent need is not an assurance of practical
performance. Even if, as bankers have anciendy suspected, doubts
about monetary policy have on occasion been the invi^ous reflection
of doubts about bankers, this still does not ensure that monetary
policy will work. As Chapter II has shown, the ultimate enemy of the
conventional wisdom is circumstance. It is never in such peril as when
enthusiastic exponents put it to a practical test. Monetary policy,
despite its unparalleled position in the conventional wisdom, makes
only secondary contact with the problem of inflation. And it has had
the misfortune to be subject to extended experiment.

THE MONETARY ILLUSION

179

II

Hist of all, monetary policy suffers from the unfortunate absence of
any occult effect. It has long been clear that economic management,
especially in the United States, would be greatly ficilitated if resort
could occasionally be had to witchcraft. Monetary policy, by far die
most promising possibility, involves none. This every good citizen
must regret.

More sombrely, the policy makes no direct contact with the wage-
price interaction. This not even its prophets suggest. Accordingly, it
must work, if at all, by reducing the aggregate demand for goods.
Its handle for accomplishing this is a higlicr interest rate and a
diminished supply of funds for lending. By thus discouraging lending
by banks and borrowings by consumers and producers, the policy is
presumed to restrict or restrain what the latter have to spend. The
reduction in this spending, if it occurs, will then have secondary (or
multiplier) effects on the spending of others. Tlic ultimate conse-
quence is to reduce the demand for goods as a whole or to restrain the
rate of increase in demand.^ By thus keeping demand from pressing
on capacity and on the labour force, prices are kept stable. Or such
must be the hope.

That is the only avenue of effect.* An alternative form of exposi-
tion emphasizes the effect of this policy on the supply of money. But
so far as this argument does not escape into mysticism, it comes to the
same thing. The money supply increases or decreases as the result of

* This will serve the same purposes as an absolute reduction if the plant capacity
and labour force of the economy are also increasii^. It is convenient in any dis-
cussion to speak in terms of absolute magnitudes— whether an increase in interest
rates does or does not reduce total spending. But while this is a convenient simpli-
fication of language, and one that leads to no important error, the question in a
growing economy will ordinarily be whether the rate of increase in demand is
reduced relative to the rate of increase in capacity. The difference in these rates will
be the source of the slack on which price subility depends.

* Theoretically the rise in the interest rate could encourage consumer saving from
current income and by the same act reduce spendii^ fi-om current income. The
possibility of such an effect, though once argued, is no longer seriously urged even
by the most convinced supporten of monetary policy.

i8o

THE AFFLUENT SOCIETY

increases or decreases in commercial bank lending. An increase in the
money supply aficcts prices by way of the increased spending of
borrowers from borrowed funds as well as through the multiplier by
those from whom they buy. When one restricts the money supply,
one restricts the spending associated with the lending and borrowing
of funds. The measures arc the same: the supply of funds available for
lending is reduced, and the interest rate is reduced to discourage
borrowing. No matter how the cake is shced the policy, if it is to
work, must restrain borrowing. And tlicrcby it becomes effective by
reducing or restraining the total volume of spending. So far there is
little disagreement between economists.

As just noted, direct spending from borrowed funds is of two kinds
—by consumers for consumer goods and by businessmen for invest-
ment. The advantage of looking at economic policy in the full con-
text of economic attitudes and behaviour will now be evident. To
restrict consumer borrowing by increasing the interest cost on instal-
ment and otlicr loans collides abruptly widi die process of consumer
demand creadon. If consumer wants were independendy determined,
an increase in interest charges could, conceivably, operate through
die consumer’s demand schedule to reduce borrowing and spending.
It seems unlikely diat die elasticity of the response would be great,
but the possibility exists. But as nutters now stand, any step to dis-
courage borrowing and buying will be automatically opposed by the
machinery for consumer demand creation. A shrinkage in consumer
borrowing will be merely a warning to those concerned with the
synthesis of consumer demand to increase their efforts. Or they can
take steps to annul the effect of the increased interest charge.

This is a matter of minimum difficulty. Consumer credit is ordin-
arily repaid in instalments, and one of the mathematical tricks of
this type of repayment is that a very large increase in interest rates
brings a very small increase in the monthly payment. Thus a man
who signs a note for $ i,8oo on the purchase of a new car to be repaid
over twenty-four months, and who agrees to an ‘add-on’ of 6 per
cent of this amount as interest, will have a total interest bill of $216
and mondily payments of $84. If the interest charge is increased by
one-third to an add-on of 8 per cent, his total interest obligation
becomes $288, but the increase in monthly payments is only $3. The

THE MONETARY ILLUSION l8l

one-third increase in interest brings but a one-thirtieth increase in the
payment.^ This increase can easily be ofBet by a lengthening of the
term of repayment. In practice it is submerged by a variety of addi-
tional inspection, insurance, and other charges. Since the customer in
contemplating the purchases is aware, not of the interest rate, but of
the monthly charge, it will be seen how readily a very large increase
in interest charges can, in practice, be offset. During the period of
active monetary policy in the early fifties, increased finance charges
were regularly followed by large increases in consumer loans. Want
creation, and the process of financing it, was still acting to exaggerate
rather than to restrain the inflationary effect of consumer spending.

There is no chance that monetary policy can have even a minimal
effect on consumer spending while its conflict with the machinery
of consumer want creation remains unresolved and, in degree, even
unrecognized, and while we concede the paramount importance of
the latter. And though the reasons have not been fully seen there is,
in fact, considerable agreement that monetary policy does not make
any effective contact with consumer borrowing and spending.

Ill

That the restriction of business investment by monetary policy in-
volves a similar conflict with a prior goal will now be apparent to
everyone. We set primary store by production. Monetary policy
seeks to prevent price increases by cutting down on the investment
by which productive growth is made possible and is sustained. It
would be hard to imagine a more abrupt collision with the dominant
position of production. Oddly enough, those who set the greatest
store by monetary policy— bankers and businessmen— are often those
who are most inclined to emphasize the importance of production
and to view increases in output with most satis&ction.

In practice the conflict between monetary policy and production
is not so severe. This is partly because of a surviving belief that
monetary policy somehow makes contact with the price level with-
out affecting the volume of investment. In the years between 1953
and 1957 the then Secretary of the Treasury, Mr. George Humphrey,

^ Consumer Instalment Credit, pt. I, vol. I, pp. 6o-i.

THE AFFLUENT SOCIETY

182

regularly expressed his conviction that the economy required a high
and rising volume of business investment and that incentives, includ-
ing tax revision, were needed to oicourage it. At the same time he
strongly endorsed a policy of monetary restraint designed to prevent
inflation. These remarkably contradictory positions can be recon-
ciled only if there is faith that, by essentially occult means, monetary
policy will stabilize prices without affecting the volrnne of producer
borrowing, investment and spending.

The conflict between production and a monetary poHcy designed
to decrease business investment is also eased by our tend^cy, des-
cribed in Chapter IX, to accept and even to applaud whatever rate of
economic growdi we are currently enjoying. Concern is rhetorical
radier than real. Hence we are not notably disturbed by a policy
which, by reducing the volume of new investment, seeks to lower
the rate of economic growth so long as serious unemployment does
not appear.

However, if individual firms were prevented by the policy from
making the investment which seems to them wise and profitable,
there would, of course, be objection. And this brings us to the final
reason why the conflict rarely reaches die acute stage.

IV

In times of capacity or near-capacity production, the context in which
inflation becomes a danger and its control indicated, profits and
profits prospects are certain to be favourable. Because production is
at or near capacity, investment in expansion will seem to the indi-
vidual firm both advantageous and singularly logical from the point
of view of the community. (The firm will be much more impressed
by the visible service it renders in increasing the supply of its product
than by die invisible effect of its investment in adding to total spend-
ing and thus to inflationary pressure.) For all of these reasons most
investment will be extremely unresponsive to moderate increases in
die interest rate which is the way in which monetary policy presents
itself to the ordinary business firm.

If the policy is applied severely, some firms will be squeezed by the
higher rates. And in practice, since interest rates arc comparatively

THE MONETARY ILLUSION

183

Sticky, some rationing of credit will occur. Some firms which would
like to borrow will be unable to do so. If the policy is pressed far
enough, investment spending will doubtless be curtailed. In the end
the slack required for price stabiUty would appear. So would the
conflict with our attitu^ on the importance of production. There
would be an equally urgent conflict between this poUcy and die
economic security which is the counterpart of high production. But
before this point is reached, another problem of even greater import
arises. That is the ei&ct of monetary pohey on different kinds and
sizes of firms.

As we have seen, when demand has been growing and the eco-
nomy is at or near capacity firms in the oHgopolistic sector are likely
to have a reserve of unhquidated gains. This enables them to pass
higher interest charges along to the consumer. (If they can pass along
wage increases, they can obviously do the same with interest.) And
by raising prices and income they can resort to unhquidated gains for
investment purposes. The need to price for returns sufficient to cover
a considerable share of investment requirements has been a stock
defence of industrial price increases for many years. Thus industries
which have luiHquidated gains are able, in effect, to contract out
firom under the effect of monetary poficy. The attractiveness of the
large firm as a bank customer and its abflity to go direedy to the
market for funds also help exempt it fi-om the effects of die pohey.

Firms in competitive markets— those whose prices and costs are
impersonally determined by the market for ah— obviously cannot
pass higher interest costs ahead to the customer. In die relevant short-
run they cannot raise the prices that they do not control to get invest-
ment funds firom their customers. As a rule, being small they cannot
circumvent the rationing of bank credit by selling securities in die
market. Hence for competitive industries— farmers, smaU builders,
small retailers, service industries, dealers— monetary pohey is efiec-
tive. And it will be effective for these firms much before it af&cts the
industries in which there is a greater measure of market control.

To recur s^ain to the experience of the fifties, in these years and
especially in 1955 and 1956 investment by agriculture, residential
builders, and— although the evidence is less clear— by other small-

l84 the AFFtUENT SOCIETY

scale industries did decline. At the same time investment by large
firms, and in producer’s durable goods where the role of the oligo-
polistic industries is dominant, was rising to record levels. Proof in
economics is an evasive thing. But we do well to pay attention when-
ever experience aiErms a theoretical probability.

It will be easy to see why monetary policy is regarded with equa-
nimity and even approval by larger and stronger firms. Unless
applied with severity over time it does not appreciably affect them.
But for the same reason diere must be grievous doubts about the
workability of the policy. Before the large volume investment spend-
ing of the larger and more powerful firms is affected, a severe squeeze
will ordinarily be placed on the capital requirements of smallcr-scale
firms. For such firms the conflict between monetary policy and pro-
ductive growth will be higlily visible and, indeed, very painful. This
will set severe limits on the rigour with which the policy may be
pursued. For apart fiom social aspects of a policy which denies
growth to the numerous and small and favours the large and the
powerful, farmers and small businessmen are not widiout political
influence.

V

As noted, the most mercurial source of spending in the economy has
long been recognized to be tliat for business investment. Spendings
by consumers and by governments have (consumer borrowing
apart) substantial elements of reliability. They are related to income
being received. They are grounded on customary patterns of beha-
viour. In the case of government outlays they have a marked
greater constancy than the revenues which support them. Investment
spending, by contrast, depends on an estimate of future returns. The
singular feature of the future is that it cannot be known. Estimates
as to what it holds will change. So accordingly will investment out-
lays. And the changes in these latter, by changing prospective earn-
ings, change the futme itself.

If monetary restraint is exercised over a period of time it may
eventually affect the investment of larger firms. This may come about
in a variety of ways but most obviously because the curtailment of
the borrowing and investment of weaker firms and industries will.

THE MONETARY ILLUSION

185

in the end, affect demand and investment prospects for the more con-
centrated sector of the economy. When this happens there will be a
revision of investment plans, and this may be large.

Monetary policy thus operates on the most mercurial dimension
of economic activity. This is the final source of inutility and it may,
indeed, be a source of considerable danger. If, the conflict with pro-
duction notwithstanding, it is applied with rigour and persistence to
produce die requisite slack, there is danger that it will do too much.
Or, to speak more precisely, diere is unavoidable uncertainty as to
just what it will do. It seeks to influence the most unpredictable
clement of aggregate demand. The result of this influence is, accord-
ingly, unpredictable. There must always be danger diat monetary
policy, if pressed to the point where it will stabilize prices, will
reduce investment to die point of causing a serious depression. Sudi
a depression is not uncorrectible. But neither is it desirable. These
matters are not, unliappily, entirely in the realm of analysis. Tliis
essay goes to press at a time when monetary policy, having been
applied for several years without stabilizing prices, shows signs of
precipitating an adventitiously large reduction in investment. The
consequences, however temporary, could be unpleasant.

In the conventional wisdom, the faith in monetary policy is still
strong. No other economic policy has ever shown such capacity to
survive failure to be hailed as a success. It will be evident, however,
that in relation to the problem of inflation— the endemic problem of
the affluent society— it is dangerous to die degree diat it is effective.
Those whose love for monetary policy is great may occasionally
wish to inquire of themselves whether die good name of the econo-
mic system might not deserve a prior claim to their affections.

CHAPTER SEVENTEEN

»

Production versus Price Stability

In the political spectrum of modem economic policy, monetary
measures arc die instrument of conservatives. The weapon of liberals
is fiscal policy. And among economists generally fiscal policy is
regarded as the ultimate economic weapon. The friends of monetary
policy aver its effectiveness, perhaps partly to allay their unconscious
doubts. The effectiveness of fiscal policy is much more rarely debated.
Moreover, it had the implicit blessing of Keynes. As the converse of
the pubUc spending wliich was the Keynesian remedy for unemploy-
ment, it has still a slight cachet of rational radicaUsm.

Fiscal policy is much simpler and more fordiright in its operation
than monetary poHcy, The mysticism has been exorcised, and die
theoretical chain which links the original action and die ultimate
effect, something always to be watched in economics, is far shorter
and involves far fewer asseverations as to what should happen. The
government taxes more than it spends. This difference is not spent.
Hence it is a net reduction in the spending of the country as a whole.
If this difference, which in the case of the United States government
is die surplus in the cash consolidated budget,^ is sufficiently increased,
then total spending in the economy will no longer press on the capa-
city of die economy. The now famous slack will result. If this slack is
large enough, firms will hesitate to raise prices— in terms of the
present analysis short-run maximization will seem inconsistent with

^ These budget tables show all receipts as against all expenditures. They diflfer
from the conventional budget totals, the ones cited in ^ discussion of

public profligacy, for the latter, as a matter of tradition, exclude some receipts and
outlays, principally those on social security account.

m

PRODUCTION VERSUS PRICE STABILITY 187

longer-run return— and wage demands 'will be resisted. Demand will
not pull up prices in the competitive sector. Prices as a result will be
stable unless, indeed, die process is pressed too far, in which case they
wUlM.

Business finns feel the impact of monetary policy initially in die
form of a change in factor cost or availability —specifically in the cost
or availabihty of credit for capital. Large firms and those with sub-
stantial market power are able, as we have seen, to pass this cost
increase along to customers, and in case of a shortage of credit they
can have recourse to another source of supply. Competitive and
smaller firms have no similar escape. Fiscal policy works, in the
main, by reducing demand. This reduction affects the demand for the
products of all firms, large and small, strong and weak. No firm, in
the technical idiom, can contract out of the movement in its demand
curve. The effect of the policy will not be precisely the same, as
between competitive and oligopoUstic markets and as between large
firms and small, but it is much more nearly cqual.^

Yet in the years since World War II in die United States, fiscal
poUcy has also revealed itself as a very poor defence against inflation.
The reason was not that it fiiiled to work but that not even its prin-
cipal proponents argued for its vigorous use. It was favoured in
principle but not in practice. The explanation is not far to seek. Here
is another unresolved conflict in economic goals. Once again the
advantage of seeing things in full social context will be plain.

II

For reasons that will be explored in detail in the next chapter, govern-
ment expenditures are likely at any given time to be near the mini-
mum which the commimity regards as tolerable. Complaint about
waste and inefficiency in performing these services, which is endemic
in our political comment and rarely 'without foundation, should not
be allowed to confuse the issue. Very important functions can be per-
formed very wastcfully and often are. And 'waste can rarely be

^ Where there are unliquiclated gains, prices will fall less promptly and earnings
will be less prompdy reduced than in a competitive industry where there are no
such gains.

i88

THE AFFLUENT SOCIETY

eliminated by reducing expenditure. It is far easier to cut the function
than the waste, and this is what occurs. In time of inflation, the eco-
nomic context of which we arc speaking, the situation of the public
services is certain to be even more tenuous because of the inevitable
tendency for public pay scales and public budgets to lag behind the
general increase in prices.

This means that a positive fiscal policy to counter inflation will
almost always require an increase in taxes. The importance of cutting
or postponing expenditures, however much it may be urged on the
more vacuous margins of the conventional wisdom, may on occasion
sustain hope. But the actual accomplishment will invariably be
negligible. On this point experience is complete. Whenever inflation
is a danger (and now and dien when it is not) spokesmen urge the
Administration and the Congress, and the latter urge upon them-
selves, sometimes with seeming seriousness, the importance of cutting
expenditures. Nothing is ever accomplished of sufficient magnitude
to adect appreciably the total spending of the economy. Quite often
nothing is accomplished. And indeed the expectations of non-accom-
plishment are such that the Congressional discussion of budget-
cutting each winter has now assiuned the innocent aspect of a folk
rite. It begins as the budget time approaches. It reaches full pitch a
few days after the budget is submitted. The gods arc appeased by
stem denunciations of public profligacy and inspired promises of vast
economies. The ceremony is solemnly described to the people by
press and radio. Thereafter the seemingly indispensable outlays are
voted, and the result is more often to increase the budget than to
reduce it.

To raise taxes to reduce demand encoimters at the outset a problem
of tmdentanding. That, in the event of insufficient demand and
depression, taxes should be cut and public outlays increased in order
to increase aggregate demand and employment is now widely
accepted. There is an inherent logic to the procedure. This is also true
of cutting public expenditures to coimtcr inflation— were this only
possible. However, the logic of increasing taxes is by no means so
evident. The first and obvious cfiect is to increase the consumer’s
livii^ costs or reduce his income. This happens at a time when
inflation is making it difficult for many people to maintain accus-

PRODUCTION VERSUS PRICE STABILITY iSp

tomed living standards. Odier taxes add to the producer’s costs. Thus
to attack inflation by raising taxes seems at first glance a curiously
backhanded procedure. It is strongly resisted by the very consider-
able number who insist, never without fervour and pride, that
subtlety in economic rdationships is an indication of error and that
truth is revealed only to the uncomplicated mind.

Ill

The most serious problem of fiscal policy is the conflict with other
economic goals.

It collides, fint of all, with the tacit truce outlined in Chapter VII
on income inequality. Taxes arc the device by which governments
have most nakedly sought to influence income distribution. As a
result, they have a considerable practical and an even deeper sym-
bolic importance in relation to this issue. Hence a proposal to increase
taxes for fiscal reasons automatically provokes a debate on the ques-
tion of ineqtiality. Liberals, who hiiherto had been abiding comfort-
ably by the terms of the truce, are required by their faith to rally to
the support of taxes which reduce inequality. Conservatives rally to
oppose them. In wartime this debate can to some extent be evaded
by invoking the doctrine of cquahty of sacrifice— the rich man can
be told that his suflerings at the hands of the tax audiorities are
roughly the counterpart of those of the soldier imder shellfire.
Despite much concentrated thought, no entirely suitable reply has
ever been devised by men of means. Thus in wartime it has been
practicable to employ the income tax to absorb excess purchasing
power. In peacetime such use of taxation will at a minimum be
complicated by a long argument over die essentially unrelated issue
of equality.

Finally, there is the now classic conflict with production. Fiscal
policy becomes eflective only as die reduced demand brings output
below the current capacity of plant and the labour force. Having
penuaded ourselves that production is of paramount importance, we
must now persuade ounelves to sacrifice it in return for price stability.
Moreover, once again the sacrifice may have to be considerable.
Where concerns are strongly organized in their markets and deal widi

THE AFFLUENT SOCIETY

190

Strong unions, i.e. where the likelihood of unliquidated gains is
great, the slack required, as already noted, may have to be quite
large. Even though, in £ict, the output is not of high urgency, the
income to those whom the slack makes imemployed is of impor-
tance.

Unlike monetary policy, fiscal poUcy makes its initial contact with
the economy not by reducing investment expenditure but by redu-
cing (in the main) consumer expenditure. In not attacking investment
it is thus, at first glance, less inimical to economic expansion or
growth. However, too much should not be made of this distinction.
Firms are encouraged to invest at least partly because production is
pressing on capacity. When it ceases to do so— when there is slack—
they can be expected to cut back on investment. Just as demand will
have an acceleration effect on investment, to use the term familiar to
economists, as production approaches capacity and the latter is
enlarged, so it will have a decelerating effect as production drops
away from capacity levels. So magnified, the movement in invest-
ment and therewith in total demand would appear offhand to re-
inforce the effect of fiscal policy. It gives a leverage to the change in
spending that is brought about by government action. But it also
means that once the economy ceases to be at capacity there is a sub-
stantial sacrifice in investment for growth. Or, to put die matter
differendy, growth will be at a maximum only when the economic
system is under that pressure to use capacity which produces infladon.

Were the economy given to occasional bouts of stimuladon with
excessive investment and rising prices— the business cycle of the
central economic tradition— then counter-cyclical repression of de-
mand might involve no serious problem. Some who have seen no
conflict between fiscal policy and growth have, without doubt,
viewed it in such a context. But if full employment and full use of
capacity is taken as the norm of economic policy, as in modem times
it is, then the rate of investment associated with full use of capacity is
also normal. A policy which holds production below capacity in the
interest of price stability inescapably sacrifices economic growth.

However, the much more serious conflict is between fiscal policy
and the unemployment which stability requires in modem markets.
Insufficient production and growth can be tolerated but this unem-

PRODUCTION VERSUS PRICE STABILITY

I9I

ployment cannot be. And to induce it deliberately is a politically
unalluring policy. In addition, even diough the unemployment
necessary for price stability is not, as a national total, very great it
will never be uniformly distributed. Those industries and com-
munities that are stationary or in which demand is increasing more
slowly will feel curtailment with especial severity. Here there will be
pockets of iniemploymcnt and distress. The policy strikes with
especial force not only on particular people but also on particular
politicians.

Conservatives will always prefer inflation to its remedies. And
faced with a choice between imemploymcnt and price increases the
liberal poUtician unhesitatingly condemns both.

The pohtics of an anti-inflationary fiscal poHcy could scarcely be
less promising.

IV

Apart firom monetary policy, fiscal poUcy is the only device for
dealing with inflation that currently has standing in the conventional
wisdom. But so long as its employment is in unresolved conflict with
other and prior economic goals it will not be used with eflective
vigour, at least in peacetime.

This conflict and the resulting inutflity of fiscal measures are not
yet widely conceded by economists. The textbooks still elucidate the
use of fiscal measures as a device for ensuring price stabiUty. They
concede that we must settle for something less than completely full
employment and that this will offer difliculties. But they assume that,
given inflation, taxes can be increased. The only difldculty is that the
pohey never looks practicable at any particular moment. Unfortun-
ately, while the conflict with other goals persists, it never will.

One last possibiUty remains. That is to combine fiscal poUcy with
control over prices and wages. As a result, prices and wages are im-
able to respond to the price-increasing influences that develop as
production approaches capacity. The controls rather than the slack
serve to prevent price increases at capacity operations. Thus diey
reconcile capacity output (and also related growth) with price
stability. It would not be necessary to enforce any substantial amount
of idle capacity and tmemployment.

192

THE AFFLUENT SOCIETY

There is a general view dut price and w^e controls accomplidi
nodiing of themselves— that they deal with symptoms rather than
with causes. To use them is to juggle with the thermometer, not the
furnace. If current demand is far in excess of the capacity of the
economy, there is an important element of truth in this contention.
The only recourse is to bring demand into balance with supply.
Anything else is an escape. But if, by fiscal or other measures, the
aggregate of demand is kept about equal to the currrait capacity of
the economy, then any such view of wage and price controls is a
gross oversimplification. Wages act on prices and prices on wages as
capacity is approached. Controls prevent this interplay. In doing so
they allow the economy to function closer to capacity without price
increases.

A few economists have conceded this function explicitly;* rather
more have concurred implicitly by agreeing that such controls are
necessary in a wartime emergency; i.e. whai there is no escape from
the need to reconcile full use of capacity with the greatest possible
degree of price stability. But on few things is the conventional wis-
dom so certain as the unwisdom of direct controls in peacetime.
Nothing better establishes the good sense and soundness of an econo-
mist than a condemnation of such controls. Nothing more quickly
brings into question his adequacy, even his motives, than the suspicion
that he is soft on the subject of controls.

The objections to these controls are numerous, even comprehen-
sive. To be effective it is assumed that they must apply comprehen-
sively to all prices and all wages. This means that the administrative
problems arc indubitably grave and become more serious with
passage of time. The spectre of such control invokes the ancient
resistance to the intrusions of government. This intrusion is indeed
considerable, for the power to set prices is not insignificant in econo-
mic decision-making. To the extent that Social Darwinists and the
utilitarian philosophers have successfully identified vitality and liberty
with the free market, controls will be regarded as an even more fsa-
reaching menace.

* Cf. for example Paul A. Samuelson, Economia (ist ed.. New York, McGraw-
Hill, 1948), p. 435. Samuelson shares the doubts eiq>ressed here about reconcilmg
this function with the current social ethos.

PRODUCTION VERSUS PRICE STABILITY I93

Finally, and perhaps most important, such controls are sharply in
conflict with conventional attitudes toward production. As Chapter
IX has shown, we set great store by the efficient 'allocation of
resources as the device for maximizing production. That was the
relevant instrument in the last century. Social nostalgia still accords
it a central role. Tliis allocation is accompHshcd in the capitaHst
society by the market— by the pull and pusli of market prices and
market wages bringing labour, capital, and materials to the firms and
industries of most efficient use. Obviously one cannot have both con-
trols and a free market which performs this function.

None of this is certain. In the war years controls were consistent
with a very large increase in output. That was because production
was expanded along less stylized but far more eflEective dimensions
than those related to improved resource allocation. Nor is it certain
that tlie controls wliich would serve to arrest the wage-price spiral
would have to be comprehensive. It is possible that very limited
restraints might serve to reconcile capacity output and price stabiUty.
This is an important point to which this essay will return. However,
for the moment it is sufficient to note that price and wage control, as
a way of reconciling price stability, maximum product, and mini-
mum unemployment, is out of bounds. It too is in conflict, no less
important if it is ostensible rather than real, with historic attitudes
toward production.^

V

A word of summary is now in order. We are impelled by present
attitudes and goals to seek to operate the economy at capacity where,
we have seen, inflation must be regarded not as an abnormal but as a
normal prospect. The same attitudes which lead us to set store by
capacity use of plant and labour force largely deny us the use of
measures for preventing inflation. Monetary poHcy collides with the

^ The hold of these ideas is so stroi^ that many would prefer the minor
effect on output that would come from efficient resource allocation by the
market in a context of price stability and some unemployment to the much greater
effect on production which would come from (a) using the unemployed resources
and (b) ^ving the incentive to increased output which may be expected when
demand presses on capacity.

H

194

THE AFFLUENT SOCIETY

process of consumer demand creation and, since it works on business
investment, is in conflict with our emphasis on growth. It is also
ineiFectual, discriminatory and, possibly, dangerous. Fiscal policy is
sharply at odds with the commitment to a level of output that ensures
full employment and the accompanying economic security. Direct
controls, which in dieory might reconcile liigh employment with
price stability, are under a comprehensive ban. We assume diat we
must have them in unworkable mass or not at all. They are in osten-
sible conflict with the goal of efficient production, for that has
anciently been identified with market allocation of resources.

These conflicts are partly obscured. The conservative disguises the
conflict between monetary policy and production by his faidi that
his policy has occult or other transcendental effects not visible to the
naked eye. The liberal, including the Keynesian economist, conceals
the conffict between fiscal pohey and production at full employment
not so much by resort to mysticism as by a systematic refusal to face
issues. This he accomplishes by keeping his advocacy of fiscal
measures in general terms while being specifically critical of unem-
ployment and under-use of plant. He surrenders the opportunity for
reconciling die conflict by agreeing that direct controls arc unsound.

Thus the way is open to recurrent inflation. Tliis, as Chapter XV
has shown, has a highly discriminatory impact on different groups.
And we shall sec in die next chapter that dicrc are deeper social con-
sequences. Inflation strikes the economy at the point where it is most
vulnerable to damage. We may put it down-after the process of
consumer demand creation and its financing— as the second of the
unsolved problems of the aflluent society.

CHAPTER EIGHTEEN

«

The Theory of Social Balance

It is not till it is discovered that high individual incomes will not purchase
the mass of mankind immunity from cholera, typhus, and ignorance, still
less secure them the positive advantages of educational opportunity and
economic security, that slowly and reluctantly, amid prophecies of moral
degeneration and economic disaster, society begins to make collective
provision for needs wliich no ordinary individual, even if he works over-
time all liis life, can provide himself.

R. H. TAWNBY^

The final problem of the productive society is what it produces. This
manifests itself in an implacable tendency to provide an opulent
supply of some things and a niggardly yield of others. This disparity
carries to the point where it is a cause of social discomfort and social
unhcalth. The line which divides our area of wealth from our area of
poverty is roughly that which divides privately produced and mar-
keted goods and services from publicly rendered services. Our wealth
in the first is not only in startling contrast with the meagreness of the
latter, but our wealth in privately produced goods is, to a marked
degree, the cause of crisis in the supply of public services. For we have
failed to see die importance, indeed the urgent need, of maintaining
a balance between the two.

This disparity between our flow of private and public goods and
services is no matter of subjective judgment. On the contrary, it is the
source of the most extensive comment which only stops short of the
direct contrast being made here. In the years following World
War II, the papers of any major city— those of New York were an
^ Equality (4th revised ed.), pp. 134-5.

I9S

THE AFFLUENT SOCIETY

196

excelleiit example— told daily of the shortages and shortcomings in
the elementary municipal and metropolitan services. The schools
were old and overcrowded. The police force was under strength and
underpaid. The parks and playgrounds were insufficient. Streets and
empty lots were filthy, and the sanitation staff was imderequipped
and in need of men. Access to the dty by those who work there was
uncertain and painful and becoming more so. Internal transportation
was overcrowded, unhealthful, and dirty. So was die air. Parking on
the streets had to be prohibited, and there was no space elsewhere.
These deficiencies were not in new and novel services but in old and
established ones. Cities have long swept their streets, helped their
people move around, educated them, kept order, and provided horse
rails for vehicles which sought to pause. That dieir residents should
have a non-toxic supply of air suggests no revolutionary dalliance
with socialism.

The discussion of this public poverty competed, on the whole
successfully, with the stories of ever-increasing opulence in privately
produced goods. The Gross National Product was rising. So were
retail sales. So was personal income. Labour productivity had also
advanced. The cars that could not be parked were being produced at
an expanded rate. The children, though without schools, subject in
the playgrounds to the affectionate interest of adults with odd tastes,
and disposed to increasingly imaginative forms of delinquency, were
admirably equipped with television sets. We had difficulty finding
storage space for the great surpluses of food despite a national dis-
position to obesity. Food was grown and packaged under private
auspices. The care and refreshment of the mind, in contrast with the
stomach, was principally in the public domain. Our colleges and
universities were severely overcrowded and imderprovidcd, and the
same was true of the mental hospitals.

The contrast was and remains evident not alone to those who read.
The family which takes its mauve and cerise, air-conditioned, power-
steered, and power-braked car out for a tour passes through cities
that are badly paved, made hideous by Utter, blighted buildings, bill-
boards, and posts for wires that should long since have been put
underground. They pass on into a countryside tiiat has been rendered
largely invisible by commercial art. (The goods which die latter

THE THEORY OF SOCIAL BALANCE

197

advertise have an absolute priority in our value system. Such aesthetic
considerations as a view of the countryside accordingly come second.
On such matters we are consistent.) They picnic on exquisitely pack-
aged food from a portable icebox by a polluted stream and go on to
spend the night at a park which is a menace to pubUc health and
morals. Just before do2dng off on an air-mattress, beneath a nylon
tent, amid the stench of decaying refuse, they may reflect vaguely on
the curious unevenness of their blessings. Is this, indeed, the American
gemus?

II

In the production of goods within the private economy it has long
been recognized that a tolerably close relationship must be main-
tained between the production of various kinds of products. The out-
put of steel and oil and machine tools is related to the production of
cars. Investment in transportation must keep abreast of the output of
goods to be transported. The supply of power must be abreast of the
growth of industries requiring it. The existence of these relationships
— coeflScients to the economist— has made possible the construction
of the input-output table which shows how changes in the produc-
tion in one industry will increase or diminish the demands on other
industries. To this table, and more especially to its ingenious author,
Professor Wassily Leontief, die world is indebted for one of its most
important of modem insights into economic relationships. If expan-
sion in one part of the economy were not matched by the requisite
expansion in other parts— were the need for balance not respected-
then botdenecks and shortages, speculative hoarding of scarce sup-
pUcs, and sharply increasing costs would ensue. Fortunately in peace-
time the market system operates easily and eflfectively to maintain
this balance, and diis together with die existence of stocks and some
flexibility in the coefficients as a result of substitution, ensures that no
serious difficulties will arise. We are reminded of the existence of the
problem only by noticing how serious it is for those coimtries—
Poland or, in a somewhat different form, India— which sedc to solve
the problem by planned measures and with a much smaller supply of
resources.

Just as there must be balance in what a community produces, so

THE AFFLUENT SOCIETY

198

there must also be balance in what the community consumes. An
increase in the use of one product creates, ineluctably, a requirement
for others. If we are to consume more can, we must have more
petrol. There must be more insurance as well as more space on which
to operate them. Beyond a certain point more and better food appean
to mean increased need for medical services. This is die certain result
of the increased consumption of tobacco and alcohol. More vacations
require more hotels and more fishing-rods. And so forth. With rare
excepdons— shortages of doctors are an exception which suggests the
rule— this balance is also maintained quite effortlessly so far as goods
for private sale and consumption arc concerned. The price system
plus a rounded condition of opulence is again the agency.

However, the relationships we arc here discussing are not confined
to the private economy. They operate comprehensively over the
whole span of private and public services. As surely as an increase in
the output of cars puts new demands on the steel industry so, also, it
places new demands on public services. Similarly, every increase in
the consumption of private goods will normally mean some facili-
tating or protective step by die state. In all cases if these services are
not forthcoming, the consequences will be in some degree ill. It will
be convenient to have a term which suggests a satisfactory relation-
ship between the supply of privately produced goods and services
and those of the state, and we may call it social balance.

The problem of social balance is ubiquitous, and frequendy it is
obtrusive. As noted, an increase in the consumption of cars requires
a facihtating supply of streets, highways, traffic control, and parking
space. The protective services of the police and the highway patrols
must also be available, as must those of the hospitals. Although the
need for balance here is extraordinarily clear, our use of privately
produced vehicles has, on occasion, got &r out of line with the supply
of the related public services. The result has been hideous road con-
gestion, an annual massacre of impressive proportions, and chronic
colitis in the cities. As on the ground, so also in the air. Planes collide
with disquieting consequences for those within when the public pro-
vision for air traffic control htils to keep pace with private use of the
airways.

But the car and the aeroplane, versus the space to use them, are

THE THEORY OF SOCIAL BALANCE 199

merely an exceptionally visible example of a requiremoit that is per-
vasive. The more goods people procure, the more packages they
discard and the more trash that must be carried away. If the appro-
priate sanitation services are not provided, the counterpart of in-
creasing opulence will be deepening filth. The greater the wealth the
thicker vrill be the dirt. This indubitably describes a tendency of our
time. As more goods are produced and owned, the greater are the
opportunities for fiaud and the more property that must be pro-
tected. If the provision of public law enforcement services do not
keep pace, the counterpart of increased well-being will, we may be
certain, be increased crime.

The city of Los Angeles, in modem times, is a near-classic study in
the problem of social balance. Magnificently efficient factories and
oil refineries, a lavish supply of cars, a vast consumption of hand-
somely packaged products, coupled vrith the absence of a municipal
trash collection service which forced the use of home incinerators,
made the air nearly imbreathable for an appreciable part of each
year. Air pollution could be controlled only by a complex and highly
developed set of public services— by better knowl^ge stemming
fi:om more research, better policing, a municipal trash collection ser-
vice, and possibly the assertion of the priority of clean air over the
production of goods. These were long in coming. The agony of a
city without useable air was the result.

The issue of social balance can be identified in many other current
problems. Thus an aspect of increasing private production is the
appearance of an extraordinary number of things which lay claim to
the interest of the yoimg. Motion pictures, television, cars, and the
vast opportimities which go with ffie mobility, together with such
less enchanting merchandise as narcotics, comic books, and pomo-
graphia, are all included in an advancing gross national product. The
child of a less opulent as well as a technologically more primitive
had far fewer such diversions. The red schoolhouse is remembered
mainly because it had a paramount position in the lives of those who
attended it that no mod!^ school can hope to attain.

In a well-run and well-regulated community, with a sound school
system, good recreational opportunities, and a good police force— in
short a community where public services have kept pace with private

200

THE AFFLUENT SOCIETY

production— the diversionary forces operating on the modan juven-
ile may do no great damage. Television and the violent mores of
Hollywood and Madison Avenue must contend with the intellectual
discipline of the school The social, adiletic, dramatic, and like attrac-
tions of the school also claim the attention of the child. These,
together with the odier recreational opportunities of the community,
minimize the tendaicy to delinquency. Experiments with violence
and immorality are checked by an effective law enforcement system
before diey become epidemic.

In a community where public services have &iled to keep abreast
of private consumption things are very different. Here, in an atmo-
sphere of private opulence and public squalor, the private goods have
full sway. Schools do not compete with television and the movies.
The dubious heroes of the latter, not Miss Jones, become die idols of
the young. The hot-rod and the wild ride take the place of more
sedentary sports for which there are inadequate ficilities or provision.
Comic books, alcohol, narcotics, and switchblade knives are, as
noted, part of the increased flow of goods, and there is nothing to
dispute their enjoyment. There is an ample supply of private wealth
to be appropriated and not much to be feared flrom the police. An
austere community is ffee from temptation. It can be austere in its
public services. Not so a rich one.

Moreover, in a society which sets large store by production, and
which has highly efiective machinery for synthesizing private wants,
there are strong pressures to have as many wage-earners in the family
as possible. As always all social behaviour is part of a piece. If both
parents are engaged in private production, the burden on the public
services is furdier increased. Children, in effect, become the charge
of the community for an appreciable part of the time. If the services
of the community do not keep pace, this will be another source of
disorder.

Residential housing also illustrates tlie problem of tiie social
balance, althot^ in a somewhat complex form. Few would wish to
contend diat, in the lower or even the middle income brackets,
Americans are munificently supplied with housing. A great many
families would like better located, or merely more, house-room, and
no advertising is necessary to persuade them of their wish. And the

THB THEORY OF SOCIAL BALANCE 201

provision of housing is in the private domain. At first glance at least,
the line we draw between private and public seems not to be pre-
venting a satisfactory allocation of resources to housing.

On closer examination, however, the problem turns out to be not
greatly different from that of education. It is improbable that the
housing industry is greatly more incompetent or inefficient in the
United States than in those coimtries— Scandinavia, Holland, or (for
die most part) England— where slums have been largely eliminated
and where minimum standards of cleanliness and comfort are well
above our own. As die experience of these countries shows, and as
we have also been learning, the housing industry functions well only
in combination widi a large, complex, and cosdy array of public
services. These include land purchase and clearance for redevelop-
ment; good neiglibourhood and city planning, and cfiective and
well-enforced zoning; a variety of financing and odier aids to the
house builder and owner; publicly supported research and architec-
tural services for an industry whidi, by its nature, is equipped to do
little on its own; and a considerable amount of direct or assisted
public construction for families in die lowest income brackets. The
quality of the housing depends not on the industry, which is given,
but on what is invested in tiiesc supplements and supports.

Ill

The case for social balance has, so far, been put n^atively. Failure to
keep public services in minimal relation to private production and
use of goods is a cause of social disorder or impairs economic per-
formance. The matter may now be put affirmativdy. By failing to
exploit the opportunity to expand public production we are missing
opportunities for enjoyment which otherwise we might have had.
Presumably a community can be as well rewarded by buying better
schools or better parks as by buying bigger cars. By concentrating on
the latter rather than the former it is filing to maximize its satis-
factions. As with scliools in the community, so with public services
over the country at large. It is scarcely sensible that we should satisfy
our wants in private goods with reiMess abimdance, while in the
case of public goods, on the evidence of the eye, we practise extreme

202

THE AFFLUENT SOCIETY

sel£<ienial. So, far from systematically exploiting the opportunities
to derive use and pleasure from these services, we do not supply what
would keep us out of trouble.

The conventional wisdom holds that the community, large or
small, makes a decision as to how much it will devote to its public
services. This decision is arrived at by democratic process. Subject to
the imperfections and imcertaintics of democracy, people decide how
much of their private income and goods they will surrender in order
to have public services of which they are in greater need. Thus there
is a balance, however rough, in the enjoyments to be had from
private goods and services and those rendered by public authority.

It will be obvious, however, that this view depends on the notion
of independently determined consumer wants. In such a world one
could with some reason defend the doctrine that the consumer, as a
voter, makes an independent choice between public and private
goods. But given the dependence effect— given that consumer wants
arc created by the process by whidi they are satisfied— the consumer
makes no su^ choice. He is subject to the forces of advertising and
emulation by which production creates its own demand. Advertising
operates exclusively, and emulation mainly, on behalf of privately
produced goods and services.^ Since management and emulative
efiects operate on behalf of private production, public services will
have an inherent tendency to lag behind. Car demand which is expen-
sively synthesized will inevitably have a much larger claim on income
than parks or public health or even roads where no such influence
operates. The engines of mass communication, in dieir highest state
of development, assail the eyes and ears of the community on behalf
of more beer but not of more schools. Even in the conventional
wisdom it will scarcely be contoided that this leads to an equal choice
between the two.

The competition is especially unequal for new products and ser-
vices. Every comer of the public psy^e is canvassed by some of die

^ Emulation does operate between communities. A new school or a new high-
way in one community does exert pressure on others to remain abreast. However,
as compared with the pervasive effects of emulation in extending the demand for
privatdy produced consumer's goods there will be agreement, I think, that this
intercommunity efiect is probably small.

THE THEORY OF SOCIAL BALANCE 20}

nation’s most talented citizens to see if the desire for some merchant-
able product can be cultivated. No similar process operates on behalf
of the non-merchantable services of the state. Indeed, while we take
die cultivation of new private wants for granted we would be
measurably shocked to see it applied to public services. The scientist
or engineer or advertising man who devotes himself to developii^
a new carburettor, cleanser, or depilatory for which the pubUc
recognizes no need and will feel none until an advertising campaign
arouses it, is one of the valued members of our society. A politician
or a public servant who dreams up a new public service is a wastrel.
Few public offences are more reprehensible.

So much for the influences which operate on die decision between
public and private production. The calm decision between public and
private consumption pictured by the conventional wisdom is, in fact,
a remarkable example of the error which arises from viewing social
behaviour out of context. The inherent tendaicy will always be for
pubhc services to fall behind private production. We have here the
first of the causes of social imbalance.

IV

Social balance is also die victim of two further features of our
society— the truce on inequality and the tendency to inflation. Since
these are now part of our context, their effect comes quickly into
view.

With rare exceptions such as the post office, public services do not
cany a price ticket to be paid for by the individual user. By their
nature they must, ordinarily, be available to alL As a result, when
they are improved or new services are initiated, there is the ancient
and troublesome question of who is to pay. This, in turn, provokes
to life the collateral but inelevant debate over inequality. As with the
use of taxation as an instrument of fiscal policy, the truce on in-
equality is broken. Liberals are obliged to argue that the services be
paid for by progressive taxation which will reduce inequahty. Com-
mitted as they are to the urgency of goods (and also, as we shall see
in a later chapter, to a somewhat mechanical view of the way in
which the level of output can be kept most secure) they must oppose

204

THE AFFLUENT SOCIETY

sales and excise taxes. Conservatives rally to the defence of inequality
—although without evex quite committing themselves in such tm-
couth terms— and oppose the use of income taxes. They, in effect,
oppose the expenditure not on the merits of the service but on the
demerits of the tax system. Since the debate over inequality cannot
be resolved, the money is frequently not appropriated and the service
not performed. It is a casualty of the economic goals of both hberals
and conservatives for both of whom die questions of social balance
are subordinate to those of produedon and, when it is evoked, of
inequality.

In practice matters are better as well as worse than diis statement of
the basic forces suggests. Given the tax structure, die revenues of the
levels of government grow with the growth of die economy. Ser-
vices can be maintained and sometimes even improved out of this
automatic accretion.

However, this effect is highly unequal. Hie revenues of the federal
government, because of its heavy reliance on income taxes, increase
more than proportionately with private economic growth. In addi-
tion, although the conventional wisdom greatly deplores the fact,
federal appropriations have only an indirect bearing on taxation.
Pubhc services are considered and voted on in accordance widi their
seeming urgency. Initiation or improvement of a particular service is
rarely, except for purposes of oratory, set against die specific effect on
taxes. Tax poHcy, in turn, is decided on the basis of the level of eco-
nomic activity, the resulting revenues, expediency, and odier con-
siderations. Among these the total of the thousands of individually
considered appropriations is but one fector. In this process the ulti-
mate tax consequence of any individual appropriation is de minimis,
and the tendency to ignore it reflects the simple mathematics of
the situation. Thus it is possible for the Congress to make decisions
affecting the social balance without invoking the question of in-
equahty.

Things are made worse, however, by die fact that a large propor-
tion of the federal revenues are pre-empted by defence. The increase
in defbice costs has also tended to absorb a large share of the normal
increase in tax revenues. The position of the federal government for
improving the social balance has also been weakened since World

THE THEORY OF SOCIAL BALANCE

205

War II by the strong, although receding, conviction that its taxes
were at artificial wartime levels and that a tacit commitment exists to
reduce taxes at the earliest opportunity.

In the states and localities the problem of social balance is much
more severe. Here tax revenues— this is especially true of the General
Property Tax— increase less than proportionately with increased
private production. Budgeting too is far more closely circumscribed
than in the case of the federal government— only the monetary
authority enjoys die pleasant privilege of underwriting its own loans.
Because of this, increased services for states and localities regularly
pose the question of more revenues and more taxes. And here, with
great regularity, the question of social balance is lost in the debate
over equality and social equity.

Thus we currently find by far the most serious social imbalance in
the services performed by local governments. The F.B.I. comes much
more easily by funds dian the city poUce force. The Department of
Agriculture can more easily keep its pest control abreast of expanding
agricultural output tiian the average city health service can keep up
with die needs of an expanding industrial population. One conse-
quence is that the federal government remains under constant pres-
sure to use its superior revenue position to help redress the balance
at the lower levels of government.

V

Finally, social imbalance is the natural ofl^pring of persistent infla-
tion. Inflation by its nature strikes different individuals and groups
with highly discriminatory effect. The most nearly unrelieved vic-
tims, apart firom those living on pensions or other fixed provision for
personal security, are those who work for the state. In the private
economy the firm which sells goods has, in general, an immediate
accommodation to the inflationary movement. Its price increases are
the inflation. The incomes of its owners and proprietors are auto-
matically accommodated to the upward movement. To the extent
that wage increases are part of the inflationary process, this is also true
of organized industrial workers. Even unoi^anized white-collar
workers are in a milieu where prices and incomes are moving up.

206

THE AFFLUENT SOCIETY

The adaptation of their incomes, if less rapid than that of the in-
dustrial workers, is still reasonably prompt.

The position of the public employee is at the other extreme. His
pay scales are highly formalized, and traditionally they have been
subject to revision only at lengthy intervals. In states and localities
inflation docs not automatically bring added revenues to pay higher
salaries and incomes. Pay revision for all public workers is subject to
the temptation to wait and see if the inflation isn’t coming to an end.
There will be some fear— this seems to have been more of a factor in
England dian in the United States— that advances in public wages
will set a bad example for private employers and imions.

Inflation means that employment is pressing on the labour supply
and that private wage and salary incomes are rising. Thus the oppor-
tunities for moving from public to private employment are especially
&vourable. Public employment, moreover, once had as a principal
attraction a high measure of social security. Industrial workers were
subject to the formidable threat of imemployment during depression.
Public employees were comparatively secure, and this security was
worth an adverse salary differential. But with improving economic
security in general this advantage has diminished. Private employ-
ment thus has come to provide better protection against inflation and
litde worse protection against other hazards. Though the dedicated
may stay in public posts, the alert go.

The deterioration of the public services in the years of inflation has
not gone unremarked. However, there has been a strong tendency to
regard it as an adventitious misfortune— something which, like a
nasty shower at a picnic, happened to blight a generally good time.
Salaries were allowed to lag, which was a pity. This is a very inade-
quate view. Discrimination against the public services is an organic
feature of inflation. Nothing so weakens government as persistent
inflation. The public administration of France for many years, of
Italy until recent times, and of other European and numerous South
American countries have been deeply sapped and eroded by the
e&cts of long-continued inflation. Social imbalance reflects itself in
inability to enforce laws, including significantly those which protect
and advance basic social justice, and in failure to maintain and im-
prove essential services. One outgrowth of the resulting imbalance

THE THEORY OF SOCIAL BALANCE 2O7

has been frustration and pervasive discontent. Over much of the
world there is a rough and not entirely accidental correlation between
the strength of indigenous communist parties or the frequency of
revolutions and the persistence of inflation.

VI

A feature of die years immediately following World War 11 was a
remarkable attack on the notion of expanding and improving public
services. During die depression years such services had been elabor-
ated and improved partly in order to fill some small part of the
vacuum left by the shrinkage of private production. During the war
years the role of government was vasdy expanded. After that came
the reaction. Much of it, unquestionably, was motivated by a desire
to rehabilitate die prestige of private production and therewith of
producers. No doubt some who joined the attack hoped, at least
tacidy, that it might be possible to sidestep the truce on taxation
vis-a-vis equality by having less taxation of all kinds. For a time the
notion that our pubUc services had somehow become inflated and
excessive was all but axiomatic. Even Uberal politicians did not
seriously protest. They found it necessary to aver that they were in
favour of public economy too.

In this discussion a certain mystique was attributed to the satis-
faction of privately supplied wants. A community decision to have
a new school means that the individual surrenders the necessary
amount, willy-nilly, in his taxes. But if he is left with that income,
he is a free man. He can decide between a better car or a television
set. This was advanced with some solemnity as an argument for the
TV set. The difficulty is that this argument leaves the community
with no way of preferring the school All private wants, where the
individual can choose, are inherendy superior to all public desires
which must be paid for by taxation and with an inevitable com-
ponent of compulsion.

The cost of public services was also held to be a desolatii^ burden
on private production, although this was at a time when the private
production was bui^eoning. Urgent warnings were issued of the
unfavourable effects of taxation on investment— T don’t know of a

208

THE AFFLUENT SOCIETY

surer way of killing off die incentive to invest than by imposing taxes
wliich are regarded by people as punitive,’* This was at a time when
the inflationary effect of a very high level of investment was causing
concern. The same individuals who were warning about die inimical
effects of taxes were strongly advocating a monetary policy designed
to reduce investment. However, an imderstanding of our economic
discourse requires an appreciation of one of its basic rules: men of
high position are allowed, by a special act of grace, to accommodate
their reasoning to the answer they need. Logic is only required in
those of lesser rank.

Finally it was argued, with no litde vigour, that expanding govern-
ment posed a grave threat to individual liberties. ‘Where distinction
and rank is achieved almost exclusively by becoming a civil servant
of the state ... it is too much to expect diat many will long prefer
freedom to security.’*

With time this attack on public services has somewhat subsided.
The disorder associated with social imbalance has become visible
even if the need for balance between private and public services is
still imperfectly appreciated.

Freedom also seemed to be surviving. Perhaps it was realized that
all organized activity requires concessions by the individual to the
group. This is true of the policeman who joins the police force, tlie
teacher who gets a job at the high school, and die executive who
makes his way up the hierarchy of Du Pont. If there are differ-
ences between public and private organization, they arc of kind
rather than of degree. As this is written the pendulum has in fret
swung back. Our liberties are now menaced by the conformity
exacted by the large corporation and its impulse to create, for its
swn purposes, the oi^anization man. This danger we may also
ourvive.

None the less, the post-war onslaught on the public services left a
lasting imprint. To suggest that we canvass our public wants to see
where happiness can be improved by more and better services has a

* Arthur F. Bums, Chairman of the President’s Council of Economic Advisen,
U.S. News & World Report, May 6, 1955.

* F. A. Hayek, The J^ad to Serfdom (London, George Roudedge Be Sons, 1944),
p. 98.

THE THEORY OP SOCIAL BALANCE

209

sharply radical tone. Even public services to avoid disorder must be
defended. By contrast the man who devises a nostrum for a non-
existent need and then successfully promotes both remains one of
nature’s noblemen.

CHAPTER NINETEEN

The Investment Balance

Social balance relates to the goods and services we consume. There
is an allied problem in the way we commit the resources that are
available for investment in the economy. The same forces which
bring us our plenitude of private goods and leave us poverty-
stricken in our public services also act to distort the distribution of
investment as between ordinary material capital and what we may
denote as the personal capital of the country. This distortion has far-
reaching effects. One of them is to impair tlic production of private
goods themselves. The situation will be seen in sharpest focus if we
pursue the latter point. It is not, however, the only or, indeed, the
most important consequence.

Economic growth—the expansion of economic output— requires
an increase in the quantity of tlie productive plant and equipment of
the country or in its quaUty or, as in the usual case, in both. This is
fully agreed. The increase in quantity is capital formation. The in-
crease in quality is what we call technological advance.

In the earhest stages of economic development, from which so
many of our economic attitudes are derived, the simple and sufficient
way of getting more growth was to have more saving and therefore
more material capital. Entrepreneurial talent was needed but, at least
in western countries, it was almost invariably, if not invariably,
forthcoming. To perform this function required some education.
But, as the example of any number of great entrepreneurs from
Commodore Vanderbilt to Henry Ford made clear, the education
could be exiguous and often was. The existence of an educated and
literate body of workers was desirable but by no means essential.

210

THE INVESTMENT BALANCE

211

Some of the greatest industrial enterprises in the United States in the
past were manned prindpally by men who could speak no English.
Most important of all, in all the earlier stages of development there
was no dose and predictable correlation between the supply of edu-
cated men and the nature of their training and the rate of techno-
logical innovation. Inventions were more often the result of brilliant
flashes of insight than the product of long-prepared training and
development. The Industrial Revolution in England was ushered in
by the invention of the flying shuttle by John Kay, the spinning jenny
by James Hargreaves, the spinning frame (presumptively) by Richard
Arkwright and, of coune, by James Watt’s steam engine. These
represented vast improvements in the capital which was being put to
industrial use. But only in the case of Watt could the innovation be
related to previous education and preparation. Kay and Hargreaves
were simple weavers with a mechanical turn of mind. Arkwright had
been apprenticed as a boy as a barber and a wigmaker and was barely
literate.

However, with the development of a great and complex industrial
plant, and even more with the development of a great and sophisti-
cated body of basic science and of experience in its appbeation, all
this has been changed. In addition to the entrepreneurs (and perhaps
one sliould add the accountants and clerks) who were more or less
automatically forthcoming, modem economic activity now requires
a great number of trained and qualified people. Investment in human
beings is, prima facie, as important as investment in material capital.
The one, in its modem complexity, depends on the other.

What is more important, the improvement in capital— technological
advance— is now almost wholly dependent on investment in educa-
tion, training, and sdmtific opportunity for individuals. One branch
of the conventional wisdom clings nostalgically to the conviction
that brilliant, isolated, and intuitive inventions are still a principal
instmment of technological progress and can occur anywhere and to
anyone.^ Benjamin Franklin is the sacred archetype of the American
genius and nothing may be done to disturb his position. But in the
unromantic fact, iimovation has become a highly organized enter-

* Cf. for example the article by G. Warren Nutter, ‘Monopoly, Bigness and
Progress’, in Journal (fPoUlkal Economy, December 1956.

212

THE AFFLUENT SOCIETY

prise. The extent of the result is predictably related to the quality and
quantity of the resources being applied to it. These resources are men
and women. Their quahty and quantity depend on the extent of die
investment in their education, training, and opportunity. They are
the source of technological change. Without them investment in
material capital will still bring growth, but it will be die inefficient
growth that is combined with technological stagnation.

II

We come now to the nub of the problem. Investment in material
capital is distributed to the various claimant industries by the market.
If earnings are liigh (at the margin) in the oil industry and low in the
textile business, it is to the oil industry dut capital will flow. This
allocation by the market works, it would appear, with tolerable
efficiency. Among the recognized crimes of economics, any interfer-
ence with the ‘free flow’ of capital has a very high standing.

But while this flow operates as between different material claim-
ants on investment funds, it operates only widi manifest imcertainty
and inefficiency as between material and personal capital. Nearly all
of the investment in individuab is in the pubUc domain. And vir-
tually all of it is outside the market system. It is the state which,
through primary and secondary schools, and through the colleges
and universities, makes the largest investment in individuals. And
where, as in the case of private colleges and universities, the state is
not direedy involved, the amount of the investment is not direedy
related to the eventual pay-out in production. Investment in refin-
eries being higher than in textile mills, the refineries will draw
investment funds. But engineers to design the refineries may be even
more important— in effect yield a higher return. And the highest
return of all may come from the scientist who makes a marked
improvement in the refining process. These are not imaginative
possibilities but common probabilities. Yet the high return to scien-
tific and technical training does not cause the funds to move from
material capital to such investment. There is no likely flow from the
building of the refineries to the education of the scientists. Here, at
the most critical point in the vaunted process of investment resource

THE INVESTMENT BALANCE

213

allocation, is an impediment of towering importance. Character-
istically, however, it has received Utde comment. It is not, like the
tariSf or monopoly, one of the classic barriers to capital movement.
Hence it did not get a foothold in economics in die last century and,
accordingly, under the intellectual grand&ther clause which has such
sway in the science it has no real standing now.

There can be no question of the importance of the impediment.
Investment in individuals is in the public domain; this investment has
become increasingly essential with the advance of science and tech-
nology; and there is no machinery for automatically allocating
resources as between material and human investment. But this is not
all. As we have seen in earlier chapters, there is active discrimination
s^ainst the investment in the public domain and hence in any part of
it. The investment in the refinery is an unmitigated good. It adds to
our stock of wealth. It is a categorical achievement. But the training
of the scientists and engineers who will run the refinery, improve its
economic efficiency, and possibly in the end replace it with some-
thing better is not a categorical good. The money so invested is not
regarded with approAral. On the contrary, it is widely regarded as a
burden. Many will judge the magnitude of the achievement in this
area by the smallness of the investment. Others will hold this invest-
ment in abeyance while arguit^ the ancient issue of equality. So
incredible is the provision for such investment that a considerable
part will have to be begged. Even the prestige of the word invest-
ment itself is not regularly accorded to these outlays. A century ago,
when educational outlays wore not intimately related to production,
men sensibly confined the word investment to the increases in capital
whidi brought a later increase in product. Education vm a consumer
outlay. The popular us^e has never been revised.^

Could it be legally arranged that youngsten were sorted out at an
early age, possibly by their test score in mathematics, and the prom-
ising then be indentured for life to a particular corporation, the flow
of investment into human development might soon be placed on a

1 Since this was written and under the impact of Soviet scientific achievements
there has been considerable discussion of our lag in investment in scientific educa-
tion. However, this is being treated as a kind of aberration, and not as a fiinda-
mental flaw in our machinery of resource allocation.

THE AFFLUENT SOCIETY

214

rough parity with that into material capital. Firms would perceive
the need for investing in their scientific and engineering stock much
as major league baseball clubs have learned the wisdom of investing
in their farm teams. Under ideal arrangements any surplus talent
could be marketed. The cost of unsuccessfully trying to educate die
inevitable errors of selection would be cither written off or partially
retrieved by using the individuals as salesmen. Under such a system,
which as noted would unfortunately involve the elimination of the
liberty of the individuals in question, it is fairly certain that invest-
ment in human beings would rise and at a rapid rate.

But so long as fi:ee choice remains, such investment must remain
largely a pubUc function. The individual, since he is only at the
beginning of earning power, cannot himself make any appreciable
part of the investment. Whether his parents can and will be wiUing
to do so is a highly accidental matter. His future employer can hardly
be expected to invest in an asset that may materialize in the plant of
a competitor or another industry. At most he wiU, as now, distribute
scholarships and fellowships in the hope of ultimately influencing the
choice of those in whom the investm^t is nearly complete. This has
no appreciable effect on the total of the investment in people. It is a
scalping operation. It does, however, suggest the store which is set
by die resulting assets.

Ill

Human development, in other words, is what economists have long
termed an external economy. Its benefits accrue to all firms; it is not
suffidendy specific to any one to be bought and paid for by it.

What is true of human development is also true of one ofitsprin-
dpal finits. That is sdentific research. A sodety which sets for itself
the goal of increasing its supply of goods vtill tend, inevitably, to
identify all innovation with additions to, changes in, or increases in
its stock of goods. It wiU assume, accordingly, that most research
will be induced and rewarded by the market.

Much will be. Under the proper circumstances— firms must be of
adequate size in the industry, and certain other conditions must be
med— we may expect our economy to do a superior job of invent-
^ Cf. American Capitalism, pp. 84-94 (sod ed.).

THE INVESTMENT BALANCE

215

iiig, developing, and redesigning consumers’ goods and improving
tlicir process of manufacture. Nor is there reason to doubt that similar
attention will be given, under equally favourable circumstances, to
the capital goods industries which support this consumers’ goods
consumption. Much of this achievement will impress us only so long
as we do not inquire how die demand for die products so developed
is contrived and sustained. If we do we arc bound to observe that
mudi of the researdi effort— as in the car industry— is devoted to
discovering changes that can be advertised. The research programme
will be built around the need to devise ‘selling points’ and ‘adver-
tising pegs’ or to accelerate ‘plaimcd obsolescence’. All diis suggests
that the incentive will be to allocate research resources to what, in
some sense, arc die least important things. The quantity is more
impressive than the way it is allocated. Still one would not wisli to
suggest that the American economy is delinquent in the attention it
devotes to diange and improvement in consumers’ goods. Clearly
it is not.

These incentives, however, operate over but a small part of total
sdentific and research activity and, indeed, over but a small part that
is potentially applicable to the production of goods. Thus a very
large amount of highly useful research cannot be spedalized to or be
sustained by any marketable product. This is most obviously true of
much so-called basic research. But it is also true of a large amount of
applied edbrt. The modem air transport is die stepchild of the mili-
tary aeroplane. It would never have sustained the underlying research
and development mdeavour on its own. The same is true in even
greater degree of the non-military uses of nudear energy. There are
numerous other cases.

It is because military considerations have induced a large allocation
of resources to research that this problem is, on the whole, less
striking than that of investment in penonal resources. Although the
research must be in the public domain, military uigency has helped
to ofiset this blight. There is litde comfort for man in the cntcum-
stances which have induced this allocation of resources or £com the
resulting weapons. But it has catalysed a great deal of important
sdentific innovation and devdopment. Far more significant research
lies behind the edhrt to exceed the speed of sound than lies behind

2i6

THE AFFLUENT SOCIETY

even the best new soap. It may well be more signiheant for industry
itself. In any event the rate of technical progress in American industry
in recent decades would have been markedly slower had it not been
for militarily inspired and for this reason publicly supported research.

IV

As noted, one must where possible deal with the conventional
wisdom on its own terms. The conventional wisdom stresses the
paramount urgency of increased production of goods. To show that
even for this purpose its allocation of investment is irrational— that
it is tolerable for research only as a by-product of military claims and
that for investment in individuals it can make no claim at all to
rationality— is impressive. However, it would be barbarous to sug-
gest that the only claim to be made on behalf of education is the
increased production of goods. It has its independent and, one must
suppose, its higher justification. A horse almost certainly appreciates
a comfortable stable, a secure supply of oats, a measure of recreation,
and conceivably the pleasure of being esteemed at least as highly as
any other horse in the stable. The non-theological quality which
most distinguishes men firom hones is the desire, in addition to these
attributes of material and psychic well-being, to know, undentand,
and reason. One may hope that investment in the things that difi^-
entiate man firom his animals requires no further justification. If,
however, this investment is less than would be justified even for the
production of goods, one wonden how very much less than the
ideal it must be for the purposes of human satisfaction and fulfilment.

V

A final and rather more speculative issue remains, which is the joint
legacy of the problem of social balance in consumption and of
balanced investment in material and personal capital
As Chapter XIV has argued, the process by which wants are now
synthesized is a potential source of economic instability. Production
and therewith employment and social security are dependent on an
inherently unstable process of consumer debt creation. This may one

THE INVESTMENT BALANCE

217

day fiilter. And a decay in emulative compulsions or in the ability to
synthesize demand could bring a fall in consumption, an increase in
unemployment, and a difficult problem of readjustment.

However great or small these dangers, they will be lessened if our
consumption is widely distributed— if productive energies serve uni-
formly the whole span of man’s wants. Since public wants are not
contrived, they are not subject to a failure of contrivance. Since they
are not sold on the instalment plan, they are not subject to curtail-
ment by any of the factors which may make people unwilling or
unable to incur debt. Thus the better the social balance the more
immune the economy to fluctuations in private demand.

One is tempted to press the matter further. Simple minds, pre-
sumably, are the easiest to manage. Better education, one product of
improved social balance, might well be expected to lessen die effec-
tiveness of synthesis and emulation in the manufacture of new wants.
At first glance, therefore, it could be regarded as inimical to the
process by which demand is now sustained. But there can also be
Htde doubt that education has a marked influence in widening the
span of the individual’s wants. Synthesis and emulation are most per-
suasive in creating desire for simple physical objects of consumption
or simple modes of enjoyment which require no previous condition-
ing of the consumer. Houses, can, the imcomplicated forms of alco-
hol, food, and sex; sports; and movies require litde prior preparation
of the subject for die highest enjoyment. A mass appeal is thus
successful, and hence it is on these things that we find concentrated
die main weight of modem want creation. By contrast, more esoteric
desires— music and fine arts, literary and scientific interests, and to
some extent travel— can normally be synthesized, if at all, only on
the basis of a good deal of prior education. Thus the effect of educa-
tion and pro tanto of social balance is to increase the range of wants to
be satisfied and to lessm the dependence on those which must be
contrived. Or, more accurately, diis is a plausible hypothesis. For so
stem have been the forces channelling our thoughts in the past that
there is litde to go on in these fertile valleys of the imagination.

CHAPTER TWENTY

«

The Transition

In one sense the main task of this essay has been accomplished. Its
concern has been with the tliraldom of a myth— the myth that pro-
duction, by its overpowering importance and its ineluctable diffi-
culty, is the central problem of our lives. We have now seen the
sources of this myth. And we have seen some of the consequences—
the tenuous and maybe dangerous process of consumer demand
creation, recurrent inflation, social imbalance— to which the myth
commits us. Emancipation of the mind is a no less worthy enterprise
than emancipation of the body. The bondsman, given his freedom
and persuaded of its virtues, is ordinarily left to enjoy it. Nor is his
emancipator blamed for failing to give him a list of things to do.

And a concern for new goals, once the old ones become suspect,
is not only the next order of philosophical business but the inevitable
one. Social philosophy, far more than nature, abhors a vacuum. Men
must sec a purpose in their efforts. This purpose can be nonsensical
and, as we have seen, if it is elaborately nonsensical that is all to the
good. Men can labour to make sense out of single steps toward the
goal without ever pausing to reflect that the goal itself is ludicrous.
But they must not question the goal. For to do so is to initiate a
search for one that serves better. Thus it is that an essay such as this is
far more important for what it destroys— or to speak more accur-
ately, for the destruction whidi it crystallizes, since the ultimate
enemy of mydi is circumstance— than for what it creates.

This is sharply at odds with the conventional wisdom. The latter
sets great store by what it calls constructive criticism. And it reserves
its scorn for what it is likely to term a purely destructive or negative

218

THE TRANSITION

219

position. In this, as so often, it manifests a sound instinct for self-
preservation.^ The attack on the conventional or accepted thought
is dismissed as an inferior and, indeed, a wanton activity and, as such,
not something that should be taken seriously. At the same time ‘con-
structive alternatives’ are invited. These are a much lower order of
danger. The threat to the conventional wisdom is always its own
irrelevance, not the appeal of a relevant alternative. In post-war West
Germany, in contrast with the Weimar regime, governments have
displayed notable stability of tenure. Considerable credit goes to the
constitutional provision for the so-called ‘constructive veto*. This,
in effect, requires the parliament to decide on a new administration
before it votes out the old one. To settle in advance on such an
alternative is difficult or impossible. Thus parliaments have had no
choice but to maintain the status quo. The conventional wisdom
fmds similar strength in asserting the moral superiority of construc-
tive criticism.

However, as always, it is sound strategy to deal with the conven-
tional wisdom on its own terms. If it inquires how we escape the
present preoccupation with production; or how we escape the race
to manufacture more wants for more goods and dien yet more
wants for yet more goods; or what is to fill the seemingly vast
vacuum which abandoning diis race would leave in our lives; or
what are to be the symbols of happiness if goods cease to be so
regarded, then it is well that there be answers. The defences of the
conventional wisdom are formidable. One should not concede it any
points. What replaces die profound preoccupation with production?

II

In the world of minor lunacy the behaviour of bodi die utterly
rational and the totally insane seems equally odd. The notion that

^ The same instinct has caused the conventional wisdom to turn vigorously on
the debunkcr of public reputations. Obviously the man who, because of psycho-
logical, commercial, or other motivation, concerns himself with trying to separate
truth from fiction in assessing human accomplishments is a grave threat to the man
of conventional wisdom. This threat has been greatly abated in modem times by
reducing die debunkcr, even when he is unqualifiedly concerned with the truth,
to the level of a literary pariah.

220

THE AFFLUENT SOCIETY

ours, inevitably, is a world of deep poverty in which production is
of supreme urgency is an old one. So is the corresponding behaviour.
The discovery that production is no longer of such urgency— that it
is something of which we are reasonably assured and which, para-
doxically, is most threatened by our failure to see it in proper per-
spective*— involves a major wrench in our attitudes. What was
soimd economic behavioiur before cannot be sound economic be-
haviour now. What were die goals of individuals, organizations and,
perhaps more especially, of government before may not be so now.
Many who will find it possible to believe that production has lost its
pristine urgency will still find the changes in behaviour and poHcy
that this suggests rather difficult to swallow. This bdiaviour and
these policies will have an air of fecklessness, even of danger. And
this, needless to say, will be exploited vigorously by the conventional
wisdom.

It was ever so. In the depression years many could agree that the
clear and immediate cause of difficulty was a shortage of demand for
goods. That the private economy might find its equilibrium not with
a demand sufficient to ensure full employment but at a level where
substantial millions were left unemployed seemed plausible enough.
Yet, having conceded all this, it was still not easy to agree that the
government should supplement the deficient private demand by
public borrowing and spending. This seemed vastly reckless. The
Keynesian diagnosis was one thing, but the Keynesian remedy was
another.

Again in die thirties the diminishing urgency of the problem of
production began to manifest itself in increasing surpluses of agri-
cultural products. For a time it was possible, and not witliout reason,
to attribute these surpluses to the Great Depression. But in the fordes
it became clear that increasing productivity in agriculture was out-
distancing constuner needs even when demand was at full employ-
ment levels. It was clearly greater than the farm industry’s capacity
for adjustment. Many came to accept this diagnosis in one form or
another. But two of the more obvious remedies— to control produc-

* Committing us, to repeat, to the tenuous process of private want creation,
causing social imbalance, contributing to economic instability, and threatening,
among other things, the supply of trained manpower.

THE TRANSITION

221

tion or to give away the surplus to people who could eat it— con-
tinued to be regarded with horror. In the early years of die New Deal
the slaughter of Utde pigs, a primitive form of production control,
created a mild form of poUtical trauma. Ever after, statesmen advo-
cated control, though it was an obvious and indeed inescapable
remedy, only after much hesitation and many elaborate manifesta-
tions of dismay designed to appease the gods and placate the con-
ventional wisdom. Wherever possible euphemisms were employed
—as diis is written, instead of taking acres out of production they are
being put into a soil bank.

Similarly, when the other obvious remedy, that of giving away
food, was first broached it was soundly denounced. To wish to give
milk to Hottentots became, for a time, a symbol of advanced
economic irresponsibUity. Ultimately die necessities of the case tri-
umphed. Under the guidance of an impeccably conservative Secre-
tary of Agriculture, Mr. Ezra Taft Benson, world-wide gifts of food
in large quantity became an established poUcy. If the Hottentots have
not yet acquired dried skim milk, it is only because they have not
sufiiciendy pressed their request. But again elaborate disguise was
essential The receiving coimtrics ‘bought’ the products with their
own currency, which meant that they suppled money that cost them
nothing and which the United States agreed not to use in appreciable
amount. Men would rarely have been poor in this world had they
been able to satisfy their desires by purchases made with money of
dieir own manufacture and which their well-supplied vendors agreed
to accept without question.

life and certainly the language would be simpler were we to
accept change, and the consequent poUcies, at thdr face value. But it
would also destroy an engaging, almost Oriental quality of our
political life which leads us to drape the urgencies of the present in
the symbols of the past. Though production has receded in impor-
tance, we shall doubtless continue to pretend that it isn’t so.

Ill

For the number of questions which we agree to resolve in accordance
with whether production is aided or retarded— made more or less

222

THE AFFLUENT SOCIETY

important— is enormous. If something seems to contribute to in-
creased production, it is good. If it fails to do so, it is useless. If it
damages production, it is evil. If it can be shown that a tax is dama-
ging to incentives and thus to production, it is per se a bad tax; and
even if this result cannot be shown, it is still wordi alleging. Our
oldest and in some ways our most beloved topic of controversy is the
tariff. Its enemies have always argued that the industries it nurtures
are inefEcient— diat resources would be used more efficiendy else-
where. They have never doubted that efficiency was the decisive
consideration. And dieir opponents, while challenging the defence
of the higher efficiency of free trade in various ways, never chal-
lenged that criterion as such.

Similarly, the debate over the large corporation has been con-
cerned almost exclusively with its efficiency. Its defenders have justi-
fied it by its competence as a producer. Its critics wondered if it
might have exceeded the optimally efficient size. The corporation is
a creature of no small cultural and political importance. Until very
recently diesc aspects of its existence have been uniformly dismissed
as of small accoimt. As with the corporation so with die trade union.
It is defended or condemned in accordance with its effect on the pro-
ductivity of its members. That it has made work more tolerable; has
enhanced the dignity of its memben; and through seniority rules
accorded its members what seem to be the natural rights of advan-
cing age are not decisive. The decisive thing is the effect these have
had on productivity.

If a locahty is declining— if power, transportation, raw-material
supplies, consumer taste, or the tax laws have given other areas or
countries an advantage— then one should encourage the people to
leave. MobiHty means efficiency. It is true that the ties of family,
friends, pastor and priest, countryside and mere inertia may make
this a Draconian and even cruel prescription. But it is the efficient
course. Until relatively recent times a large amoimt of industrial and
occupational disease could be justified on the grounds diat considera-
tions of cost did not permit of its elimination. Such a contention is no
longer acceptable in the conventional wisdom. The latter would not
hesitate, however, to point out that the concessions won over the
years by the coal-miners has speeded the relative decline of this

THE TRANSITION

223

industry. Given the importance of production, this was most
unfortunate.

But if the things produced are not of great urgency, it follows that
the efficiency of the process by wliich they are produced ceases to be
an overriding consideration. New and usually much more difficult
tests must be applied. It is not unlikely, indeed, that tliesc will already
be found playing a considerable but surreptitious role and this now
becomes obtrusive.

Thus the .argument over the progressive income tax has long been
concerned witli its effect on efficiency. Some have argued that it
impairs incentives to increased efficiency. Odiers have argued that it
does not. But if efficiency is not decisive, then tlic debate must go
forward on other grounds. These may well include tlie simple and
imcouth question of who is to pay how much. However, it is witli
this question that many who now talk about efficiency arc really
concerned.

Moreover, if efficiency is no longer a prime criterion, tariff policy
will have to be resolved on die basis of how far we should go in
making trade die handmaidoi of larger national policy or what part
compassion should play in easing die problems of distressed indus-
tries or areas. But, in fact, trade policy is already partly subordinate
to both international comity and local charity. Efficiency has already
partly surrendered to these other and more urgent considerations.

If the modem corporation must manufacture not only goods but
the desire for the goods it manufactures, the efficiency of the first part
of this activity ceases to be decisive. One could indeed argue that
human happiness would be as effectively advanced by inefficiency in
want creation as efficiency in production. Under these circumstances,
the relation of the modem corporation to the people who comprise
it— their chance for dignity, individuality, and full development of
penonality— may be at least as important as its efficiency. These may
be wortii having even at higher cost of production. Evidently the
unions, in seeking to make life tolerable on the job, were being
governed by a sound instinct. Why should life be intolerable to make
things of small urgency?

Attitudes toward ffie declining community may need to be
revised. The happiness and contentment of the people of Lawrence

THE AFFLUENT SOCIETY

224

and Lowell and thdr preference, remarkable as it may seem, for life
in these ancient towns, now becomes a consideration to set against
the effi cienc y with which they are employed. The rational and com-
passionate society may seek to avoid the heartbreaks of an industrial
Diaspora. If die goods have ceased to be urgent, can we sternly com-
mand men to leave their homes to produce them with maximum
efficiency?

Coal has mmierous substitutes. The marginal urgency of its pre-
sent employments is low. The workers who made their Ufe more
hvable at the expense of the most efficient production of coal may
well have had reason on their side. In any case the substitutes— oil,
water power, and atomic energy— are cleaner and more pleasant to
work with.

The Benthamite test of public policy was ‘what serves the greatest
happiness of the greatest number*, and happiness was more or less
imphddy identihed with productivity. This is still the official test.
In modem times the test has not been very rigorously apphed. We
have sensed though we have not recognized the dechning impor-
tance of goods. Yet even in its deteriorated form we cling to this
criterion. It is so much simpler than to substitute the other tests—
compassion, individual happiness and well-being, the minimization
of community or other social tensions— which now become relevant.

IV

Much more than decisions on economic policy are involved. A sys-
tem of morality is at stake. For what we regard as the Puritan inheri-
tance was soundly grounded on economic circumstance. In a country
that was being carved from the wilderness, thrift and labour were the
obhgations of everyone, for they conserved and enlarged the supply
of goods which sustained life itself. And the central or classical
tradition of economics was more than an analysis of economic
behaviour and a set of rules for economic polity. It also had a moral
code. The world owed no man a living. Unless he worked he did
not eat. The obligation thus imposed required him to labour on his
own behalf and therewith on behalf of others. Failure to work, even
when it could be afforded, was offensive to what came to be

THE TRANSITION

225

called the Victorian, but could as well have been named the
economic, morality. ‘To live in idleness, even if you have the means,
is not only injurious to yourself, but a species of hraud upon the
comminiity.’^

But if the goods have ceased to be urgent, where is the fraud? Can
the North Dakota farmer be indicted for failure to labour hard and
long to produce the wheat that his government wishes passionately
it did not have to buy? Are we desperately dependent on the dili-
gence of the worker who applies maroon and pink enamel to the
functioidess bulge of a modem motor-car? The idle man may still be
an enemy of himself. But it is hard to say that the loss of his effort is
da m a g in g to society. Yet it is such damage which causes us to con-
demn idleness.

Again, the fict that a man was damaging society by his failure to
produce has been, in the last analysis, the basis for a fair amount of
highly convenient indifference and evm cruelty in our behaviour.
The churches have long featured the virtue of loving one’s neigh-
bom. But the practical churchman has also recognized the need to
reconcile this with basic economic necessities. A good deal of prac-
tical heartlessness was what served the social good. Many people have
always found it painful to work. To show them compassion might
be to damage production. The heartbreaks of migration in pursuit of
jobs mig^t be considerable, but how much worse the inefficiency of
producing in the wrong place. No tears should be wasted on the
farmers who go bankrupt. This is the path to more efficient farm
production. In the Unit^ States, as in otho: western countries, we
have for long had a respected secular priesthood whose function it
has been to rise above questions of religious ethics, kindness, and
compassion and show how these might have to be sacrificed on the
altar of the larger good. That larger good, invariably, was more
efficient production. The sacrifice obviously loses some of its point
if it is on behalf of the more efficient production of goods for the
sadsfection of wants of which people are not yet aware. It is even
more tenuous, in its philosophical foundations, if it is to permit the

I William A. Alcott (a New Ingiand moralist and schoolmaster of the last
century) quoted by Irving G. WylDe in The Self-Made Man in America (New
Brunsvnek, Rutgers University Press, 1954), p. 41.

226

THE AFFLUENT SOCIETY

more efficient contriving of wants of which people are not aware.
And this latter is no insignificant industry in our time.

At this point even the most calloused of readers will regard with
sympathy the tragic impUcations for estabUshed ideas which the
rejection of scarcity and the acceptance of affluence involve. The
almost incredibly elaborate efforts of the conventional economic
wisdom to protect the present myth become imderstandable. One
has a sense of disloyalty, almost of treachery, in destroying it.

Yet the escape from the diraldom of productive efficiency and
unremitting labour is not without its opportunities. However, one
final bridge must be built between the world of scarcity and that of
affluence. For in the world of scarcity the need for goods was, as just
noticed, powerfully reinforced by the compulsion to work. The
individual who did not work, unless rarely favoured by circum-
stance, was penalized by a total loss of income. That penalty still
widely persists even though it now enforces the production of rela-
tively unimportant goods. And the need to provide jobs requires us
to face the unhappy choice either of having the economy constantly
under inflationary strain or consigning some part of the working
force to joblessness and inferior income. Obviously we shall not reap
the rewards of affluence until we solve this problem.

CHAPTER TWENTY-ONE

»

The Divorce of Production from Security

We have seen that while our productive energies are used to make
things of no great urgency— things for which demand must be syn-
thesized at elaborate cost or they might not be wanted at all— the
process of production continues to be of nearly undiminished ur-
gency as a source of income. The income men derive from producing
things of slight consequence is of great consequence. The production
reflects the low marginal utility of the goods to society. The income
reflects the high total utility of a livelihood to a person. For this
reason, although there is conventional effort to deny it, income and
employment rather than the goods have become our basic economic
concern. This is revealed in the almost uncontrollable tendency to
diink of depressions not in terms of lost output but in terms of unem-
ployment and of the equally powerful tendency to identify good
times with full employment rather than with high production.

Moreover, the urgency of offering employment to all who seek it
is probably increasing. This is a not unnatural consequence of
affluence. When the income of the employed worker is high, it is not
easy to defend a situation in which a small minority of workers have
no employment income at all. Such discrimination seems altogether
too flagrant. With increasing opulence we are thus more firmly com-
mitted to finding jobs for everyone. Our situation is that of a factory
which must be operated at top speed for three shifts and seven days a
week even at some risk of eventual breakdown, not because the
product is in demand— on the contrary, much ingenuity is required
to dear the shipping platform— but because any lower rate of opera-
tion will leave some of the people in town without a livdihood. If

227

228

THE AFFLUENT SOCIETY

that misfortune is the alternative, then the factory may have to be so
operated. But the question of freeing the community from such
dangerous dependence will unquestionably arise.

In the real world, apart from the danger of breakdown,^ there is
also the problem of inflation. So long as we arc committed by the
imperatives of employment and income to operate at the capacity of
plant and labour force, we shall have the threat of rising prices.
Persistent inflation is not a happy prospect. It is also the long-run
enemy of social balance.

The solution, or at least one part of it, is to have a reasonably
satisfactory substitute for production as a source of income. This and
this alone would break the present nexus between production and
income and enable us to take a more relaxed and rational view of
output without subjecting individual members of the society to
hardship.

II

An obvious device for breaking the nexus between production and
income security is at hand— that is the system of unemployment
compensation. It provides income apart from production. To serve,
however, it must be cast in a new and radically different role. In the
past, imemployment compensation has served two principal pur-
poses. It has eased the hardship of the worker who was making a
routine change of jobs such as might be the result of a declining
demand for one product and an increasing demand for another. And
it has protected the worker from short-run changes in the level of
i^gregate demand which, on occasion, reduced the requirement for
workers below the presently available labour force. Unemploymoit
compoisation did not protect him from a continuing frilure to em-
ploy die full labour force, for the duration of the payments was
striedy limited and useful though they mig^t be as a stop-gap they
were far from being a substitute for wage income. In 1956 payments
in difrerent states averaged from $18 to $36 weekly. In the same year
average wages in manufretuting establishments were just under
$80 weekly.

^ See pp. 158 f£

THE DIVORCE OF PRODUCTION FROM SECURITY 229

The meagreness of the payments is related to attitudes toward
production. If production is all-important, then there should be no
source of income that is a dose substitute. People should be required
to work and produce— or else. And in fict nothing has so haunted
the discussion of sodal seciuity legislation as the spectre of the
worker who lives amiably off his unemployment compensation
pay and contributes nothing to sodety in return. So payments have
been kept at levels relevant to survival rather than to comfort. And
although the most painful prospect facing die worker under modem
capitalism is not the short-term unemployment that is ensured but the
unemployment assodated with depression and continuing defidency
in demand— the kind of imemployment that was experienced by so
many through the decade of the thirties— this greater risk has re-
mained essentially uncovered. Sads&ctoiy insurance against such
long-term unemployment would also provide the opportunity for
long-term malingering. The lazy worker needed to be faced with the
fact that sooner or later his eligibility would be exhausted and he
would have to find a job. And to be satisfactory, the bmefits would
have to be lai^er.

Were unemployment compensation to approach the level of the
weddy wage, we should in fket be prepared for some increase in
deliberate idleness— in malingering as a way of life. So loi^ as pro-
duction was accorded priority, any increase in voluntary idleness was
pro (onto intolerable sdihough, in keeping with the refined illogic
with which the conventional wisdom regarded production, involun-
tary imemployment in depression, and the consequent loss of output,
was never especially reprehensible. But in a world where production
is no longer urgent we can obviously view an increase in volimtary
idleness with some equanimity. Yet even if the unemployment
compensation were dose to the ws^e, it is not certain thatihe malin-
gering would be great. Fean in diis matter have always been extra-
ordinarily exaggerated. In the thirties it was widdy assumed that
unemploymoit compensation, even as a badly paid alternative to
toil, woidd be seized upon by a large number of people. In fact, the
proportion of the active labour force exercising ^ option has
always been negligible. The aversion to idleness is remarkably strong
both in those who view with misgivings those who work and in

THE AFFLUENT SOCIETY

230

those who work. The tendency to think of idleness as ‘a species of
&aud upon the community* is not peculiar to the upper income
classes. One problem in winning a measure of release from our
present commitment to full employment is the stigma which for a
long time will continue to attach to any kind of unemployment. It
will continue to be disreputable.

If unemployment is a disaster for individuak, we have no dioice
but always to produce at or near the capacity of the labour force.
The continuing result will be the tcmsions and the dangers associated
with the need to frbricate demand for increasingly unimportant
goods and the persistent inflation which follows from the instability
of the economy at full employment. To many even the escape or
partial escape from these troubles will not seem to justify a reduction
in the incentive to work or a possible subsidy to idleness. Even wifli
the support of logic and necessity one can go only so far in breaking
the icons.

However, there are ways of avoiding any important eflect on
incentives. At the same time the system can be so designed as to keep
it from adding to inflation and to make it an important and even
vital reinforcement to other fiscal policy as a protection against
depression. Since depressions remain a major threat to economic
security this latter is a consideration of central importance.

Ill

If the level of unemployment compensation is very close to the em-
ployed wage, this will be a cause of upward pressure on wages as the
economy approaches full employment. If unemployment is a finan-
cially attractive alternative to employment, the bargaining position,
both of individual workers and of unions, will be increased. And if
some workers must be bid out of well-compensated unemployment
by employers, this will add to the upward pressure on ws^es. We
have seen that as capacity of plant and laboiu: force are approached,
there are now strong forces causing wages to act on prices and prices
on wages. The eflect of unemployment compensation that is dose to
die weddy wage would add to inflationary pressures. It would make

THE DIVORCE OF PRODUCTION FROM SECURITY 23I

unemploymeat tolerable, but it would make the approach to full
employment even more inflationary than now.

But at full employment the level of unemployment compaisadon
need not be high. At this point comparatively little hardship is
caused if it is low in comparison with the employed wage. Workers
are not relying on such compensation to tide them over long-term
unemployment, for there is none. The traditional purpose of such
compensation, as noted, is to hdp die individual during routine job
transfers. When employment is high and job opportunities are
numerous, these transfers will be quickly made. An alternative to
relying on unemployment compensation is at hand. That is to find a
job. One reason for die large gap that appeared between the level of
imemployment compensation and the level of w^es in the years
following World War II was that these were years of virtually full
employment. As a result the level of compensation, for the great
majority of workers, was a matter of small consequence and secon-
dary political interest.

When there is some general unemployment— when die economy
is not operating at the full capacity of the labour force— conditions
are almost exacdy reversed. Then opportunities are few; die time in
transition between jobs will be greater; there is now no certain
escape feom unemployment into a job. The chance for re-employ-
ment does not depend on the individual’s own edbrts. Such efforts
will be unavailing as long as there is an insufficiency in aggregate
demand. It is on this that the unemployment depends. This being so,
high compensation rates do not interfere with re-employment. And
since the capacity of the economy and the labour force are not being
fully used, high compensation rates do not add to inflationary pres-
sures. They do add to income and consumer demand. This they do
automatically. As a man loses his wage he gains alternative income
of the same order of magnitude. Thus such payments act far more
effixrtively than any deliberate fiscal policy— spending on public
enterprises, for example— to arrest defiation and enhance macro-
economic security.

The dear answer, therefore, is that unemployment compensation
should be increased as unemployment increases and should be dimi-
nished as full employment is approached. It will be convenient to

THE AFFLUENT SOCIETY

232

have a name for such a system, and we may call it Cyclically Gradu-
ated Compensation^ or more conveniently by the initials C.G.C. It
would not be difficult to design, and it represents an essential advance
over the present static system. Indeed it is hard to think of a sii^le
measure of economic reform that would have more satisfactory
ef&ct. Apart from breaking the connection between output and
economic security, of the importance of which more will be said
presently, it would largely eliminate the hazard of depression tmem-
ployment for the worker. By stabilizing demand it would go far to
mitigate the threat of depression. At the same time there would be no
addition to the inflationary pressures at full employment and no
interference, at such times, with the search for jobs. To the extent
that malingering is mduced by high rates of unemployment compen-
sation diis problem disappears. When jobs are plentiful, there would
be no incentive to such idleness, for compensation would be rela-
tively low. When jobs are unavailable, no useful distinction can be
made between those who are voluntarily and those who are involun-
tarily unemployed. Neither can find work.

IV

The administration of the present system of tmemployment compen-
sation by the individual states, together with its commitment to the
principle of insiurance and reserves and die use of merit ratings, has
made it notably inflexible. Changes in the level and duration of
compensation come slowly as the result of action by the indiAndual
state legislatures. To get C.G.C. by state action would be quite
hopeless.

Fortunately this is not necessary or desirable. The present system,
administered by the states and with the present diflferentiak between
states, should continue to provide the basic payment.* C.G.C. should
be a purely federal enterprise. Economic policy relating to the level

* The tefisrence to the business qrde here is not to the andent rhythmic move*
ment but rather to chai^ in the level of demand and employment of whatever
nature and however induced.

* However, more satis&ctory federal standards would be required. They are
needed in any case.

THE DIVORCE OF PRODUCTION FROM SECURITY 233

of economic output is now a recognized federal responsibility. The
federal government is accountable. Pro tauto, the unemployment
associated with changes in output is a federal responsibihty. Since
such unemployment has no conceivable actuarial aspect, it should
be a current budgetary charge. When seasonally adjusted unemploy-
ment remains above tlie level which represents the amount neces-
sarily associated witli full employment for a specified period of time,
the federal supplement would become payable. This would take die
form of a specified fraction of the difference between die worker’s
weekly earnings over a period in his last employment and his entitle-
ment under estabHshed unemployment compensation. By way of
illustration, if it is assumed that 2 million is die maximum amoimt
of unemployment associated widi full employment— i.e., die maxi-
mum amount attributable to seasonal idleness, those engaged in
changing jobs and the others for whom unemployment is a short-
term affair— C.G.C. would be paid in the amount of, say, half
the difference between standard unemployment compensation and the
individual’s last wage. When unemployment passed 3 million, the
C.G.C. payment would rise to two-thirds and perhaps at 4 million
to a top of four-fifths of the difference. At this point the worker who
earned the average 1956 weekly wage of $80, and who was entitled
to a regular (and comparatively generous) payment in that year of
$36, would have a total weekly income of $71.20. Of this $35.20
would be fi:om C.G.C. (The surviving difference represents the con-
tinuing concession to the Puritan principle that leisure should be less
amply rewarded than work.) Moreover although under C.G.C. the
unemployment and the employed wage can come very close to-
gether, and this is a central virtue of the device, the di^rential in
favour of the employed wage cannot be entirely eliminated. The
normal, if surprising preference of people for work ought, no doubt,
to be reinforced by a pecuniary incentive so that if a job is available
a man can be depended upon to take it.

The present limitation on the number of weeks for which com-
pensation may be paid is based on the belief that the individual can,
given time and effort, find a new job. This is true of short-term
unemployment-rthe unemployment that is incidental to changing
demand for workers under conditions of full employment and ample

234 the affluent society

job opportunities. It is not the case of unemployment which is caused
by shifts in the level of output that are beyond the power of the
individual worker, by his own effort, to correct. Therefore the worker
should be entitled to compensation for this type of unemployment
for as long as it lasts. In other words, as long as unemploymoit
continues above die speciffed levels, the total of die C.G.C. and
the regular payments should continue. The extra cost, beyond
the normal period of eligibility, is also logically a federal responsi-
bility.

'Vl^cn aggregate demand in the economy foils below the level that
employs the entire labour force, the resulting unemployment does
not distribute itself uniformly across the country. Depending on
their industries some areas and communides are seriously affected;
in odiers the impact is slight. To the worker who lives in a town
where 50 per cent of the working force is unemployed, it is not
entirely reassuring to know that over die country as a whole the
average tmemployment is comparatively low. The question will
arise as to whether C.G.C. might have a regional or local adjustment
Might it not be declared in effect in an area or community of high
unemployment even though the national unemployment is below
the minimum? And might it not be suspended in areas where unem-
ployment is low even though total unemployment is above the
minimum? The advantage of cautious steps in this direction will be
evident. It would make C.G.C. more effective in die areas afflicted
by unemployment; it would minimize its competition with jobs
in those areas that are not. The danger is that it will interfere with
inter-regional migration in search of employment. But this, we
have seen, is no longer subject to die imperatives of a poor society.
A system of regional or local adjustments would be a logical
devdopment.

There will be objection that once the rates are advanced to the
levd associated widi a higher volume of unemployment, the pres-
sure of unions and voters generally will be :^;ainst dieir reduction
even as unemployment declines. This may be so. It is unhappily
impossible in a democratic society to think of a single measure for the
improvement of social well-being which is not subject to subversion
by ill-concdved minority or even majority pressures. The post

THE DIVORCE OF PRODUCTION FROM SECURITY 235

office, not precisely a novelty among institutions of civilized govern-
ment, continues to be subject to the eilbrts of citizens to have it carry
their mail if not for nothing at least for a minor fraction of the cost.
But the principles of C.G.C. arc well within the range of popular
understanding whidi is rarely as low as ordinarily assumed. Com-
pensation can be high when unemployment is substantial only be-
cause it is low when unemployment is low. Then it does not keep
people from taking jobs. Nor does it put pressure on wage rates by
forcii^ employen to bid against high compensation levels. These are
not matters that are difficult to grasp. Those who beUeve so almost
certainly underrate the intelligence and responsibility of imion
leaders, the rank and file, and of workers generally.

V

As matters now stand there is but one point at which the American
economy can function. That is the level at which virtually the full
labour force is employed. This, we have seen, is a point of consider-
able tension. The synthesis of consumer wants must proceed at a
high and what could be a breakneck rate. At full employment
the economy is patently unstable. Prices move relentlessly upward.
But if production is much below the full employment level, a
drastic reduction in income is visited on those who are imable to
find jobs. This is taken as a serious indication of economic failure,
and is.

With C.G.C. we widen the band within which the economy can
function. This we do by insuring that no particular group of people
is singled out for misfi>rtune whm demand falls below full employ-
ment levels. The manifest unfiiimess of doii^ so now excludes im-
employment as a policy. Or, to put the matter di&rently, we are
seeking to ensure that there is a range of output over which the
economy can function which accords with the imperfect and awk-
ward instruments available to regulate the level of output. At present
the problem of keeping the economy at full employment levels and
avoiding inflation is roughly equivalent to asking a reluctant surgeon
to do a lobotomy with a spade. In addition, C.G.C. hdps ensure that
mild unemployment will not become serious unemployment. It adds

THE AFFLUENT SOCIETY

236

to purchasii^ power and demand as unemployment increases and to
the labour force as tmemployment declines.

Those who are appalled by a measiure which seems to give sanction
to unemployment should bear several facts in mind. The unemploy-
ment here being tolerated is at the margin. The total civihan labour
force in 1956 was 67*5 milHon. Subject to considerations to be men-
tioned in a moment, economic management requires an operating
margin of possible unemployment of up to perhaps four miUion.
There are no longer grounds for contending that tlie goods produced
by these workers are of urgent importance. Given the stigmata
anciently associated with idleness, the effect of this unemployment on
those affected may be a more serious matter.

However, as usual in economic affeirs, the goal is not perfection
but the best that can be managed. C.G.C. represents a marked
improvement over the present situation. It offers the prospect of a
sufficient operating margin for price stabihty. It compensates the
imemployment associated with dais margin, whereas such unemploy-
ment may now occur anyway and without effective compensation.
By adding a new and important automatic stabilizer, it helps to
ensure that the imemployment associated with stabiUty will not be-
come the more serious imemployment associated with depression.
This requires a special word.

Through increased pubhc outlays and through the reduction or
remission of taxes, we have at hand measures for dealing with a
deficiency in aggregate demand and thus with depression. The use of
these measures is not in conffict with other social goals and for this
reason depression, in contrast with inflation, is not an intractable
problem of the affluent society. None the less, it remains the major
threat to economic security. In particular, private spending can fall
away more rapidly than fiscal measures can provide a substitute.
Hence there is always danger of painful unemployment while cor-
rective action is getting under way or overtaking a deflationary
spiral. Hiis is made more probable because of the inevitability of
debate over whether the time has arrived for deUberate fiscal action
—for spending or tax reduction— and the omnipresent hope that
if things are left alone recovery will come anyway. We have also
seen that the darker of the downward spiral has been enhanced

THE DIVORCE OF PRODUCTION PROM SECURITY 237

by the modem process of consumer demand and debt creation.

C.G.C. is not a substitute for other fiscal measures. But it does
ensure comparative stability in wage income. This is a large sector of
total income. It is also the one which is most threatened by the large
commitment to consumer debt, i.e. it is here that in the event of
deflation there is danger of a large cut in current spending as people
seek to maintain their debt service. Most important, C.G.C. elides
the danger, indeed the near certainty, of delay that is implicit in
deliberate fiscal action.

Our need is for a measure which enables us to escape the tensions
that are inevitable in the present imperative to produce at capacity,
and the hazards in trying to do so, while improving our defences
against more serious imcmploymcnt. All of this is accomplished by
lifting the level of compensation as employment recedes and as un-
employment changes its basic diaracter hrom an incident in job
transfer, to a source of requisite slack for price stability, to a basic
dureat to economic security.

To repeat, all this implies a lessened pressure on die labour force.
It implies that a small amoimt of unemployment will, in a degree, be
considered normal.

In recent years there has been the beginning of a discussion of the
four-day week. In 1956 it was formally advanced as a prospect by the
Republican candidate for the Vice-presidency, Mr. Richard M.
Nixon. This discussion tacidy accepts the fact that we do not urgendy
need the goods that are produced on the other two or three. Perhaps
the problems of at^usting to three days’ leisure a week are not gready
less serious than those of adjusting to radicr longer periods— properly
paid, it is again to be recalled— at intervals during a lifetime.

VI

Since inflation is the implacable enemy of social balance, we cannot
have it in a society where the redress of such balance is a central goal.
The eflcct of C.G.C. is to make tolerable the unemployment vdiidi
is associated with price stability. To minimize this unemployment,
even diot^ it has been rendered at least partially painless, will
still be thought by many a desirable goal of policy. It will also

THE AFFLUENT SOCIETY

238

have the probable effect of increasing the rate of economic growth.

If such a maximum employment policy is pursued, and if inflation
is to be avoided, the only possible course is to have more controls.
Given full employment or any dose approach to it, wages and prices
are subject to large discretionary movements. The only preventative
is some public restraint on this discretion.

This might not be so very difficult to arrange. In the conventional
wisdom the only possible system of control is one that controls all
prices and aU wages. This is then, and perhaps rightly, dismissed as
unworkable, at least in ordinary times. But more limited action might
restrain the interaction of prices and wages and allow the economy to
approach more closely to full employment without sacrifice of price
stability. It need not cover all industries. No problem exists where
there are no unions and where employers obviously have no dis-
cretionary power over prices. There arc other industries— like the
service trades— whidi could probably be dismissed as derivative
rather than pace-setting in their role. Where, on the basis of past
behaviour, prices and wages do interact to bring persistent price
advances, wage increases that are held to require a price increase
might be subject to ratification by a public tribunal or one on which
representatives of man^ement, labour, and the public participated.
It is not inappropriate that the public should intervene when it is the
public that pays. Wage increases not alleged to require price in-
creases would not be subject to such ratification. Wage advances so
granted and those foimd to be within the capacity of the Industry to
absorb could not thereafter, without showing of cause, be offiet by
price increases. There is no reason why such or— since this suggestion
is illustrative— similar arrangements could not be highly decentral-
ized and characterized by comparative informality.

In one branch of the conventional wisdom— given patience, fidth,
and prayer- unemployment, inflation, and controls can all be
avoided. The real menace in this view lies with diose who persist in
suggesting that we cannot reconcile irreconcilables. At a minimum
they arc inconvetiient; at the worst they arc subvenive. In light of
existii^ attitudes a limited system of controls might wdl provide the
most satisfactory reconciliation. But a divorce of production firom
the imperatives of employment and individual economic security is

THE DIVORCE OF PRODUCTION FROM SECURITY 239

also a possibility. So is a combination of the two. A rich country, like
a rich man, has the luxury of choice. The only thing it lacks, much
as we might wish for it, is die privilege of avoiding choice.

Those who find intolerable the designs here offered may wish to
reflect, at least momentarily, on whether it is because they are assert-
ing this privilege.

CHAPTER TWENTY-TWO

»

The Redress of Balance

Our next task is to find a way of obtaining and then of maintaining
a balance in tlie great flow of goods and services with which our
wealdi each year rewards us. In particular, we must find a way to
remedy die poverty whicli afflicts us in pubUc services and which is
in such increasingly bizarre contrast with our affluence in private
goods. This is necessary to temper and, more hopefully, to ehminate
the social disorders which are the counterpart of die present im-
balance. It is necessary in the long run for promoting the growth of
private output itself. Such balance is a matter of elementary common
sense in a country in which need is becoming so exiguous that it
must be cherished where it exists and nurtured where it does not. To
create the demand for new cars we must contrive elaborate and
functionless changes each year and then subject die consumer to
ruthless psycliological pressures to persuade him of their importance.
Were this process to falter or break down, the consequences would
be disturbing. In the meantime there are large ready-made needs for
schools, hospitals, slum clearance and urban redevelopment, sanita-
tion, parks, playgrounds, police, and a thousand odier things. Of
these needs almost no one must be persuaded. They arc unavailable
only because, as pubHc officials of aU kinds and ranks explain each day
with practised skill, the money to provide them is unavailable. So it
has come about diat we get growth and increased employment along
the dimension of private goods only at the price of increasingly fran-
tic persuasion. We exploit but poorly the opportunity along the
dimension of pubhe services. The economy is geared to the least
urgent set of human wants. It would be far more secure if it were
based on the whole range of need.

240

THE REDRESS OF BALANCE

241

II

The problem will not be settled by a resolve to spend more for
schools and streets and other services and to tax accordingly. Such
decisions are made every day, and they do not come to grips with the
causes of the imbalance. These lie much deeper. The most important
difference between private and public goods and services is a tech-
nical one. The first lend themselves to being sold to individuals. The
second do not. As noted above,^ in die evolution of economic enter-
prise, the things wliich could be produced and sold for a price were
taken over by private producers. Those that could not, but which
were in the end no less urgent for that reason, remained with the
state. Bread and steel went naturally to private enterprise, for they
could readily be produced and marketed by individuals to indi-
viduals. Police protection, sanitation, and sewer systems remained
with pubhc authority for, on the whole, they could not. Once the
decision was taken to make education universal and compulsory, it
ceased to be a marketable commodity. With the rise of the national
state so did national defence. The line between pubHc and private
activity, as we Anew it at any given moment, is the product of many
forces— tradition, ideological preference, and social urgency all play
some part. But to a far greater degree than is commonly supposed,
functions accrue to the state because, as a purely technical matter,
there is no alternative to public management.

The goods and services which are marketable at a price have a
position of elementary strategic advantage in the economy. Their
price provides the income which commands labour, capital, and raw
materials for production. This is inheroit in the productive process.
In the absence of social intervention, private production will mono-
polize all resources. Only as something is done about it Avill resources
become aArailable for public services. In Anglo-Saxon constitutional
history, the requirement of an affirmative act to divert resotnrees
firom priA^te to pubUc use Avas the key weapon of parliament in con-
tending for power Avith the sovereign. The king had no— or, more
precisely, but few— recurring revenues. Hence all taxes for public

^ Pages 104-107.

242

THE AFFLUENT SOCIETY

purposes had to be specifically voted. Gradually it became settled
tliat diere must be redress of grievances before supply. Apart firom
the use of the power of the purse as the protector of popular Uberty,
there was much else to be said for the practice. In poor and ill-
governed societies private goods meant comfort and life itself Food,
clothing, and shelter, all technically subject to private purchase and
sale, had an urgency greater than any public service with the possible
exception of the provision of law and order. The burden of proof
was on any step that diverted resources from the satisfaction of these
simple biological requirements to the almost invariably spenddirift
services of the state.

Recurring revalues are now commonplace. The control of the
purse is still an element in the distribution of power between the
legislative and executive authority. But it is only one element in a
complex relationship and, imlike England imder the Stuarts, the
approval of expenditures, not the voting of taxes, is the linchpin of
the legislature’s power. Yet a good deal remains unchanged. We still
seek to synthesize, on behalf of private goods, an urgency that was
once provided not by Madison Avenue but by the even more eilec-
tive importunities of hunger and cold. And for a very large part of
our public activity, revenues are relatively static. Although aggregate
income increases, many tax systems return a comparatively fixed
dollar amoimt. Hence new public needs, or even the increase in the
requirements for old ones incident on increasing population, require
affirmative steps to transfer resources to public use. There must first
be a finding of need. The burden of proof lies with those who pro-
pose the expenditure. Resources do not automatically accrue to
public authority for a decision as to how they may best be distributed
to schools, roads, police, pubUc housing, and other claimant ends.
We are startled by the thought It would lead to waste.

But with increasing income, resources do so accrue to the private
individual. Nor when he buys a new car out of increased income is
he required to prove need. We may assume that many fewer cars
would be purchased than at present were it necessary to make a
positive case for their purchase. Such a case must be made for schools.

THB REDKESS OF BALANCE

243

III

The solution is a system of taxation which automatically makes a
pro rata share of increasing income available to public au^ority for
public purposes. The task of public authority, like that of private
individuals, will be to distribute this increase in accordance with
relative need. Schools and roads will then no longer be at a disad-
vantage as compared with cars and television sets in having to prove
absolute justification.

The practical solution would be much eased were the revenues of
the federal government available for the service of social balance.
These, to the extent of about four-fifths of the total, come from per-
sonal and corporation income taxes. Subject to some variations, these
taxes rise ratlier more than proportionately with increases in private
income. Unhappily they are presently pre-empted in large measure
by the requirements of national defence and the competition of arms.
In the mid-fifties defence expenditures were rather more than half of
all the expenditures of the federal government and rather more than
the total expenditures of states and localities combined. Were this
sum to become available in any considerable part for the civilian
services of governments in the years ahead, social balance could be
quickly restored. And present income taxes would admirably keep
the balance and without formally upsetting the present compromise
on the question of equality. The word ‘formally’ should perhaps be
stressed, for in one articulate and influential branch of the conven-
tional wisdom high tax rates are justifiable for military purposes but
immoral and confiscatory if used for civilian purposes.

Perhaps the time will come when federal revenues and the normal
annual increase will be not pre-empted so extensively for military
purposes. Conventional attitudes hold otherwise; on all prospects of
mankind there is hope for betterment save those having to do with
an eventual end, wifoout war, to die arms race. Here the hard cold
voice of realism warns there is no hope. Perhaps things are not so
utterly hopeless.

But meanwhile the problem of social balance must be foced. So far
as the federal government is concerned, it must be accomplished

244

THE AFFLUENT SOCIETY

while relying primarily on the personal and corporate income
taxes. As we shall see presently, there are odier taxes with a liigh
claim to consideration, but there are odier units of government with
higher claim to their use. As usual, the solution is implicit in the
alternatives. The test is not that liigh mihtary costs make reductions
in other public outlays necessary. Rather it is whether, given these
mihtary outlays, we are more in need of the services that improve
social balance or die additional private goods with which we are
more affluently supplied than ever before. When die issue is so
presented and faced, there can be but one conclusion.^

However, even though the higher urgency of the services for
social balance is conceded, there is still the problem of providing
the revenue. And since it is income taxes that must be used, the
question of social balance can easily be lost sight of in the reopened
argument over equahty. The truce will be broken and hberals and
conservatives willjoin batde on this issue and forget about the poverty
in the public services that awaits correction and, as we shall see pre-
sently, the poverty of people whicli can only be corrected at in-
creased pubUc cost. All this— schools, hospitals, even the scientific
research on whidi increased production depends— must wait wliile
we debate the ancient and unresolvablc question of whether the rich
arc too rich.

The only hope— and in the nature of things it rests primarily with
liberals— is to separate the issue of equahty firom that of social
balance. The second is by far the more important question. The fact
that a tacit truce exists on the issue of inequahty is proof of its com-
parative lack of social urgency. In the past the Uberal poUtician has
countered the conservative proposal for reduction in top-bracket
income taxes with the proposal that rehef be confined to the lower
brackets. And he has insisted that any necessary tax increase be carried
more tiian proportionately by the higher income brackets. The result

^This discussion assumes a satisfactory level of employment. Taxes and expen-
ditures may be respectively lowered and increased to correct an insufficiency in
demand. When social imbalance is great it will be dear that there is a strong case
for correcting a shortage of demand by increased spending for needed public ser-
vices rather than by a tax reduction whidi allows of increased spendi^ for less
needed private goods.

THE REDRESS OF BALANCE

245

has been to make him a co-conspirator widi the conservative in
reducing taxes, whatever the cost in social balance; and his insistence
on making taxes an instrument of greater equaHty has made it diffi-
cult or impossible to increase them. Meanwhile, the individuals with
whom he sympathizes and whom he seeks to favour are no longer
the tax-ridden poor of Bengal or the first Empire but people who, by
all historical standards, arc themselves comparatively opulent citizens.
In any case, they would be among the first beneficiaries of the better
education, health, housing, and other services which would be the
fiuits of improved social balance, and they would be the long-run
beneficiaries of more nearly adequate investment in people.

The rational hberal, in tlic future, will resist tax reduction, even
that which ostensibly favours the poor, if it is at the price of social
balance. And, for the same reason, he will not hesitate to accept in-
creases that are neutral as regards die distribution of income. His
classical commitment to greater equality can far better be kept by
attacking as a separate issue die more egregious of the loopholes in
the present tax laws. These loopholes— preferential treatment of
capital gains and the special depletion allowances for mineral, includ-
ing in particular oil, recovery— arc strongly in conflict with tradi-
tional liberal attitudes, for this is inequality sanctioned by the state.
There is work aiough here for any egalitarian crusader.

IV

While there is much that the federal government must do by way of
redressing balance, as Chapter XVHI has suggested, it is in state and
local services that the imbalance is most striking. Here, however, the
solution— though it involves another wrench in liberal attitudes— is
most clear. It involves much expanded use of the sales tax.

So long as social balance is imperfect there should be no hesitation
in urging high rates. Coverage should be general on consumer pro-
ducts and services. In the aflluent society no useful distinction can be
made between luxuries and necessaries. Food and clothing are as
difficult as ever to do without. But they can be and firequendy are
among the most opulent of expenditures.

The relation of die sales tax to the problem of social balance is

THE AFFLUENT SOCIETY

246

admirably direct. The community is affluent in privately produced
goods. It is poor in public services. The obvious solution is to tax the
former to provide foe latter— by making private goods more expen-
sive, public goods arc made more abundant. Motion pictures, elec-
tronic entertainment, and cigarettes are made more costly so that
schools can be more handsomely supported. We pay more for soap,
detergents, and vacuum cleaners in order that we may have cleaner
cities and less occasion to use them. We have more expensive cars
and petrol so that we may have highways and streets on whicli to
drive them. Food being comparatively cheap and abundant, we tax
it in order to have better medical services and better healfo in which
to enjoy it. This forthright solution has foe furdier advantage that
sales taxation can be employed with fair efficiency by states and even
by cities. It is in the services rendered by these governments that the
problem of social balance is especially severe. The yield of the sales
tax increases with increasing production. As wants are contrived for
private goods more revenues are provided for public use. The general
property tax, foe principal alternative to foe sales tax, is rigid and
inflexible. Since its rates must ordinarily be raised for additional ser-
vices, including those that are associated with increasing income and
product, foe burden of proving need is especially heavy. This tax is
a poor servant of social balance.

During foe present century foe use of sales taxation by states and
cities has been growing. Liberals have ordinarily resisted its use. At a
minimum they have viewed it with grave misgiving. This has again
made the liberal foe effective enemy of social balance. The reasons
for this opposition provide an interesting example of how ideas, as
they remain stereotyped in face of change, can force those who hold
them into roles inconsistent with their own professions. The Ameri-
can liberal has been, all things considered, foe opponent of better
schools, better communities, better urban communications, and
indeed even of greater economic stability.

The eff^t of a sales tax varies greatly as between a poor and an
affluent country, and foe difference is one not of degree but of kind.
Under foe ancien regime in France foe tax on salt achieved an endur-
ing reputation for its oppressiveness which it retains in parts of
modem India to this day. b foe United States a tax on salt, even one

THB REDRESS OF BALANCE 247

that doubled or trebled its price, would work no perceptible hard-
ship. It is not that salt is more dispensable now than in the day of die
gabelle. But where it was then a major object of expenditure it is now
an insignificant one. And where the price of salt once afiected visibly
and direedy what remained for other use, it is now too small to have
a noticeable effect.

As with salt so with other things. In a fiunily which can buy only
bread and doth, a tax on bread and dothing means that children will
be hungrier and less well clad. In a family which can buy many
things the adjustment comes at the margin in spending for petrol,
instalment payments, the races, or the quality of the ceremonial steak.

Thus docs affluence alter the case against sales taxation. It wiU be
argued that some people are still very poor. The sales tax, unlike the
income tax, weighs heavily on the small consumption of such indi-
viduals. But if the income tax is unavailable or in service of other
ends, the only alternative is to sacrifice social balance. A poor society
righdy adjusts its poHcy to the poor. An affluent sodety may pro-
perly inquire whether, instead, it shouldn’t remove the poverty. As
we shall see in the next chapter, moreover, improved sodal balance
is one of the first requisites for the elimination of poverty. The
modem liberal rallies to protect the poor firom the taxes which in the
next generation, as the result of a higher investment in their children,
would eliminate poverty.

V

There is another objection to gready multiplied use of the sales tax
which is that, unlike the persoiul and corporation income taxes, it
makes no positive contribution to economic stability. The latter do
so in two respects. Falling on the corporations and the well-to-do,
they weigh most heavily on income ^t is on its way to be saved
rather than on income that is on its way to be spent for consumers*
goods. The investment of saved income has long been considered the
most mercurial and hence the least certain link between the receipt
of income and its return to the spendii^ stream. The income tax thus
taps and ensures spendii^ where this is intrinsically the least cer-
tain. Income taxes and especially the personal income tax have, in

THE ATFLUENT SOCIETY

248

addition, their role as built-in stabilizers of the economy. As incomes
the personal tax, through the mechanism of the progressive rates,
automatically reduces itself. As a result, and not Avithout reason, it
has come to be regarded as central to the strategy of economic man-
agement.

However, it is of the essence of the present argiunent that other
goals share in urgency with protection and maximization of total
output. One is the social balance that is served by sales taxation.
Moreover, die principal purpose of the measures outlined in the last
chapter was to make possible the escape from the conmiitment to
maximum production widiout doing damage to individual econo-
mic security.

But social balance also adds to the stability and security of pro-
duedon along another dimension, for we have seen that exploitation
of the solid needs of the pubUc sector of die economy, as distinct from
the tenuous and expensively syndiesizcd wants for private goods,
will almost certainly contribute to stability and orderly economic
growth. Production will then be based on die whole range of human
wants, not a part. As such it will be more secure.

Finally, with better social balance, investment in human resources
will be kept more nearly abreast of that in material capital. This, we
have seen, is the touchstone for technological advance. As such it is a
most important and possibly the most important factor in economic
growth. Such are the paradoxes of economic policy.

The much increased use of the sales tax, as here suggested, is
obviously not intended as a substitute for the income tax. This has
long been the fond dream of conservatives. The present intention,
which is to break the deadlock imposed by the extraneous relation
of the income tax to equality and divert a much increased share of
resources to public need, accords with the conventional wisdom of
neither conservatives nor liberals.

None the less, it is the latter who will be most reluctant. Apart from
the ancient commitment to equality, the Keynesian system is, pre-
eminently, the conventional wisdom of Uberals. And here support
for the income tax is categorical. Keynes did not foresee that the
rapid expansion in output which was implicit in his ideas would soon
bring us to the time when not total output but its composition would

THE REDRESS OF BALANCE

249

become die critical matter. Had he survived, he would no doubt
have been perturbed by the tendency of his followers to concentrate
their poUcy on die single goal of increased output. He did not lack
discriminadon. But his followers or some of them will almost cer-
tainly continue to protect the Keynesian system, with its concentra-
tion on aggr^ate demand and output, from ideas which Keynes
might have been disposed to urge. Such is the &te of anyone who
becomes a part of the conventional wisdom.

VI

Given a sufficiency of demand, the responding production of goods
in the modem economy is almost completely reliable. We have seen
in the early chapters of this essay why men once had reason to regard
the economic system as a meagre and perilous thing. And we have
seen how these ideas have persisted after the problem of production
was conquered. There will be some who will still suggest that to
divert more resources to pubhc use will be to imperil private pro-
duction. Hiere is not the slightest ground for this suggestion; and we
have seen, in fact, that the risk lies in another direction— that our
rehance on private goods is by methods that threaten the stabiUty of
demand, and that social imbalance imperils the prospect for long-run
economic growdi. Still the fear will be expressed.

Here is the last advantage of sales taxation as a technique for divert-
ing resources to pubUc use. This tax has been recommended for years
by the most impeccable of conservatives. Such august audiences as
the National Association of Maniffiicturers have repeatedly heard and
applauded speeches reciting its virtues. It lias been made clear that it
does not damage incentives or interfere with production. It is true
that the sales tax has been given these credenti^ as an alternative to
other taxes. But it has received this blessing from those who speak
with the prestige of producers. As a political point this is not
negligible.

One final observation may be made. There will be question as to
what is the test of balance— at what point may we conclude that
balance has been achieved in the satisfiiction of private and public
needs. The answer is that no test can be apphed, for none exists. The

250

THE AFFLUENT SOCIETY

traditional formulation is that the satisfaction returned to the com-
munity horn a nurginal increment of resources devoted to public
piuposes should be equal to the satisfaction of the same increment in
private employment. These are incommensurate, partly because dif-
ferent people are involved, and partly because it makes the cardinal
error of comparing satisfaction of wants that are synthesized with
those that are not.

But a precise equilibrium is not very important. For another mark
of an affluent society is the opportunity for the existence of a con-
siderable margin for error on such matters. The present imbalance is
dear, as are the forces and ideas which give the priority to private as
compared with public goods. This being so, the direction in which
we move to correct matten is utterly plain. We can also assume,
given the power of the forces that have operated to accord a priority
to private goods, that the distance to be traversed is considerable,
when we arrive, the opulence of our private consumption will no
longer be in contrast with the poverty of our schools, the tmloveli-
ncss and congestion of our cities, our inability to get to work without
struggle, and the social disorder that is assodated with imbalance.
But the precise point of balance will never be defined. This will be of
comfort only to those who believe that any failure of definition can
be made to score dedsively against a larger idea.

CHAPTER TWENTY-THREE

*

The New Position of Poverty

‘The study of die causes of poverty’, Alfred Marshall observed at the
turn of the century, ‘is the study of the causes of the degradation of a
large part of mankind.’ He spoke of contemporary England as well
as of the world beyond. A vast number of people both in town and
country, he noted, had insufficient food, clothing, and house-room;
they were: ‘Overworked and undertaught, weary and careworn,
without quiet and without leisure.’ The chance of their succour, he
concluded, gave to economic studies ‘their chief and their highest
interest’.^

No contemporary economist would be likely to make such an
observation about the United States. Conventional economic dis-
course does make occasional obeisance to the continued existence of
some poverty. ‘We must remember that wc still have a great many
poor people.’ This usefully allays uneasiness about the relevance of
conventional economic goals and especially of economic efficiency.
For some people wants must be synthesized. Hence the importance
of the goods is not per se very high. But others are far closer to need.
And hence wc must not be cavalier about the urgency of providing
them with the most for the least. The sales tax may have merit for the
opulent, but it still bears heavily on the poor. Thus poverty survives
in economic discourse pardy as a buttress to die conventional econo-
mic wisdom. Still, in a world of a weekly industrial wage of $8o
and a $3,960 median family income, it can no longer be presented
as a univenal or massive affliction. It is more nearly an after-
thought.

^ Prmcipks cf Economia (Sth cd.), pp. 2-4.

351

252 THE AFFLUENT SOCIETY

The privation of which Marshall spoke was, a half<x5ntury ago,
die common lot at least of all who worked without special skill. As a
general affliction, it was ended by increased output which, however
imperfeedy it may have been distributed, nevertheless accrued in
substantial amount to those who worked for a living. The result was
to reduce poverty from the problem of a majority to dial of a
minority. It ceased to be a general case and became a special case. It is
this which has put the problem of poverty into its peculiar modem
form.

II

For poverty does survive. There is no firm definition of this pheno-
menon and again, save as a tactic for countering the intellectual
obstructionist, no precise definition is needed. In part it is a physical
matter; those afflicted have such limited and insufficient food, such
poor clodiing, such crowded, cold and dirty shelter that life is painfiil
as well as comparatively brief. But just as it is far too tempting to say
that, in matters of living standards, everytliing is relative, so it is
wrong to rest everything on absolutes. People are poverty-stricken
when dieir income, even if adequate for survival, falls markedly
behind that of the community. Then they cannot have what the
larger community regards as die minimum necessary for decency;
and they cannot wholly escape, therefore, the judgment of the larger
community that they are indecent. They are degraded for, in the
literal sense, they live outside die grades or categories which the
community regards as acceptable. In the mid-fifties, by acceptable
estimate, one family in thirteen in the United States had a cash
income from all sources of less than a thousand dollars. In addition a
very large number of individuals, not members of families, were in
this income class. To some extent family life is itself a luxiuy of an
adequate income. The hard core of the very poor was declining but
not with great rapidity.*

A substantial share of these low incomes are in ^[riculture— in

* Statistical Abstract, igs^, p. 312. In 1955, 7*7 per cent of families were estimated
to have had incomes of less than |i,ooo as compared with 8*8 in 1954, 8*6 in 1953
and 8*5 in 1952. Ihese figures reflected a reduction fix>m 11*5 per cent in 1950
when, however, prices were considerably lower.

THE NEW POSITION OF POVERTY 253

1954, 27*4 per cent of all farm families had cash incomes of less than
a thousand dollan as compared with 4*9 per cent of urban fiunilies
who were below this level. These rural families had further incomes
in the form of shelter and farm-grown food which causes the esti-
mate of cash income to understate dicir position. However, there is
probably more danger of exaggerating than of minimizing the con-
tribution of the impainted shacks, the reluctant animals, and the
barren garden patches by whidi the rural poor eke out their income.

This agricultural poverty has a tendency to be concentrated in
specific areas. The Appalachian plateau and its valleys, parts of the
southern coastal plain and the Piedmont plateau, the country of low
hills between the Appalachians and the Mississippi, the cut-over lands
of the Lake States, the Ozark plateau, all provide examples. In 1950
in such areas nearly a miUion farm families had^ross receipts of less
than $1,200 and about a quarter of a million had less than $250. In
the southern Appalachians the average net income of all full-time
&rmers in 1949 was less than $500. In the southern Piedmont the
average was only slightly higher. In 1950 a milUon and a half &rm
fbnilies, principally in die above-mentioned areas, liad net cash
incomes from all sources of less than a thousand dollars.^ The modem
locus of poverty is even more the rural than the turban slum.

Ill

One can think of modem poverty as falling into two broad cate-
gories. First there is what may be called case poverty. This one
encounters in every community, mral or urban, however prosperous
that community or the times. Case poverty is the poor fiurm family
with the junk-filled yard and the dirty children playing in the bare
dirt. Or it is the grey-black hovel beside the railway tracks. Or it is
the basement dwelling in the alley.

Case poverty is commonly and properly rdated to some charac-
teristic of the individuals so afflicted. Nearly everyone else has
mastered his environment; this proves that it is not intractable. But

^ Developmmt of Agrieulum’s Human Resources, A Report on Problems of Low
Income Farmers (United States Department of Agricultute, 1955). Figures showing
gross receipts exclude fumers over sbety-five years of age.

254

THE AFFLUENT SOCIETY

some quality peculiar to the individual or family involved— mental
deficiency, bad health, inability to adapt to the discipline of modem
economic life, excessive procreation, alcohol, insufficient education,
or perhaps a combination of several of these handicaps— has kept
these individuals from participating in the general well-being.

Second, there is what may be called insular poverty— that which
manifests itself as an ‘island’ of poverty. In die island everyone or
nearly everyone is poor. Here, evidently, it is not so easy to explain
matters by individual iiudequacy. We may mark individuals down
as intrinsically deficient; it is not proper or even wise so to charac-
terize an entire community. For some reason the people of the island
have been firustrated by their environment.

This is not the place to explore in detail the causes of insular
poverty. They are complex and many of the commonly assigned
causes are eidier excessively simple or wrong. The resource endow-
ment or the fertility of the land, the conunonplace explanations, have
htde to do with it. Connecticut, a state of high incomes, has few
resources and a remarkably stony soil. West Virginia is richly en-
dowed. Connecticut has long been rich and West Virginia poor.

Insular poverty has something to do with the desire of a compara-
tively large mmiber of people to spend their lives at or near the place
of their birth. Tliis homing instinct causes them to bar the solution,
always open as an individual remedy in a coimtry without barriers to
emigration, to escape the island of poverty in which diey were bom.
And so long as they remain they are committed to a pattern of j^ri-
cultural land use or of mining, industrial, or other employment
which is unproductive, episodic, or otherwise unremunerative.^
Meanwhile the poverty of the commimity ensures that educational
opportunities will be limited, that health services will be poor, and

^ Thus in the Appalachian plateau, settlement occurred aloi^ the valleys on
farms which were of the small scale appropriate to a largely self^uffident agricul-
ture. Time has tendered such viticulture obsolete. Other areas produce the same
crops far more efiiciently; chaining standards have made what once seemed a
tolerable standard of living exceedingly primitive. Yet the massive reorganization
of land use that would be required— fu larger farms or conceivably h^hly capital-
ized forest enterprises— are &r beyond the capacities, both education^ and finan-
cial, of the people involved. Meanwhile the homing instmet causes them— or at
least a huge number— to persist in the area.

THB NEW POSITION OF POVERTY

255

that subsequent generations will be ill prepared either for mastering
the enviromnent into which they arc bom or for migration to areas
of higher income outside. It is a reasonable presumption, too, that the
homing instinct operates most powerfully among the poorly edu-
cated.

In some circmnstances escape may not be possible. Especially in
the urban slum, race or poverty may confine individuak to an area
of intrinsically limited opportunity. And once again the environ-
ment perpetuates its handicaps through poor schools, evil neighbour-
hood influences, and bad preparation for life.

The most certain thing about modem poverty is that it is not
efficiendy remedied by a general and tolerably well-distributed ad-
vance in income. Case poverty is not remedied because the specific
individual inadequacy precludes employment and participation in
the general advance. Insular poverty is not direedy alleviated because
the advance docs not necessarily remove the specific firustrations ot
environment to which the people of these islands are subject. Tlus
is not to say that it has no effect. Secure job opportunities elsewhere,
a concomitant of industrial advance, work against the homing
instinct. And so even more direedy does the spread of industrializa-
tion. The appearance of industry in parts of the Tennessee Valley
area has had a strong remedial efifrct on the insular poverty of those
areas. But it remains that advance caimot improve the position of
those who, by virtue of self or enviromnent, cannot participate or
are not reached.

IV

These circumstances have caused a profoundly interesting although
litde recognized change in what may be termed the political eco-
nomy of poverty. With the transition of the very poor firom a
majority to a comparative minority position, they ceased to be auto-
matically an object of intnest to the politician. Political identification
with those of the lowest estate has andendy brought the rqproaches
of the well-to-do, but it has had the compensating advantage of
alignment with a large majority. Now any politician who speaks for
the very poor is speaking for a small and also inarticulate minority.
As a result the modem Hberal politidan aligns himself not with the

256 THE AFFLUENT SOCIETY

poverty-ridden members of the community but with the fiur more
numerous people who enjoy the far more affluent income of (say)
the modem trade union member. Ambrose Bierce, in The DeviVs
Dictionary, called poverty ‘a file provided for the teeth of the rats of
reform*. It is so no longer. Reform now concerns itself with people
who are relatively wcU-to-do— whether the comparison be with
their own past or with those who are really at the bottom of the
income ladder.

The poverty-stricken are furdier forgotten because it is assumed
that with increasing output poverty mmt disappear. Increased output
eliminated the general poverty of all who worked. Accordingly it
must, sooner or later, eliminate the special poverty that still remains.
As we have just seen, this is not to be expected or, in any case, it will
be an infinitely time-consiuning and unreliable remedy. Yet just as
the arithmetic of modem politics makes it tempting to overlook the
very poor, so the supposition that increasing output will remedy
their case has made it easy to do so too.

To put the matter another way, die concern for inequality had
vitality only so long as die many suffered privation while a few had
much. It did not survive as a burning issue in a time when the many
had much even thougli others had much more. It is otu: misfortune
that when inequaUty declined as an issue, the slate was not left dean.
A residual and in some ways rather more hopeless problem remained.

V

An affluent society, that is also both compassionate and rational,
would, no doubt, secure to all who needed it the minimum income
essential for decency and comfort. The cormpting efflxt on the
human spirit of a small amount of imeamed revenue has unquestion-
ably been exaggerated as, indeed, have the character-building values
of hunger and privation. To secure to each family a minimum stan-
dard, as a normal function of the sodety, would hdp ensure that the
misfortunes of parents, deserved or otherwise, were not visited on
their children. It would help ensure tiiat poverty was not sdf-
perpetuating. Most of the reaction, which no doubt would be almost
universally adverse, is based on obsolete attitudes. When poverty was

THE NEW POSITION OF POVERTY

257

a majority phenomenon, such action could not be afforded. A poor
society, as this essay has previously shown, had to enforce the rule
that the person who did not work could not cat. And possibly it was
justified in the added cruelty of applying the rule to those who could
not work or whose efficiency was far below par. An affluent society
has no similar excuse for such rigour. It can use the forthright remedy
of providing for those in want. Nothing requires it to be compas-
sionate. But it has no high philosopliical justification for callousness.

None the less any such fordiright remedy for poverty is beyond
reasonable hope. Also, as in the limiting case of the alcoholic or the
mental incompetent, it involves difficulties. To spend income re-
quires a minimum of character and inteUigence even as to produce it.
By far the best hope for the cHmination, or in any case the mini-
mization, of poverty lies in less direct but, conceivably, almost
equally effective means.

The first and strategic step in an attack on poverty is to sec that it is
no longer self-perpetuating. This means ensuring that the investment
in children firom families presently afflicted be as htde below normal
as possible. If the children of poor famihes have first-rate schools and
school attendance is properly enforced; if the children, though badly
fed at home, are well nourished at school; if the community has
sound health services, and the physical well-being of the children is
vigilantly watched; if there is opportunity for advanced education
for those who quaHfy regardless of means; and if, especially in the
case of urban communities, law and order are well enforced and
recreation is adequate— then there is a very good chance that the
children of the very poor will come to maturity widiout grave dis-
advantage. In the case of insular poverty this remedy requires that the
services of the community be assisted firom outside. Poverty is self-
perpetuating because the poorest communities are poorest in the ser-
vices which would eUminate it. To eUminate poverty efiBdently we
should invest more than proportionately in the children of the poor
community. It is there that high-quaUty schools, strong health ser-
vices, special provision for nutrition and recreation are most needed
to compensate for the very low investment which families are able to
make in their own offspring.

The effect of education and related investment in individuals is to

K

258 THE AFFLUENT SOCIETY

enable them either to contend more effectively with their environ-
ment, or to escape it and take up life elsewhere on more or less equal
terms with others. The role of education as an antidote to the homing
instinct which crowds people into the areas of inadequate opportun-
ity and frustration is also clear. However, in the strategy of the attack
on insular poverty a place remains for an attack on the frustrations of
the environment itself. This is particularly clear in the case of the
slum. Slum clearance and expansion of low- and middle-income
housing removes a comprehensive set of frustrations and greatly
widens opportunity. There is a roughly parallel opportunity in the
rural slum. By identifying a land use which is consistent with a satis-
factory standard of living, and by assisting with the necessary re-
organization of land and capital, pubhc authority can help individuals
to surmount frustrations to which they are now subject. The process
promises to be expensive and also time-consuming. But the question
is less one of feasibihty than of will.*

Nor is case poverty in the contemporary generation wholly in-
transigent. Much can be done to treat those characteristics which
cause people to reject or be rejected by the modem industrial society.
Educational deficiencies can be overcome. Mental deficiencies can be
treated. Physical handicaps can be remedied. The limiting factor is
not knowledge of what can be done. Overwhelmingly it is our frilurc
to invest in people.

VI

It will be clear that to a remarkable extent the requirements for the
ehmination of poverty arc the same as for social balance. (Indeed a
good deal of case poverty can be attributed to the failure to maintain
social balance.) The myopic preoccupation with production and
material investment has diverted our attention from the more urgent
questions of how we are employing our resources and, in particular,
from the greater need and opportunity for investing in penons.

* The problem of the ratal slum, and its reorganization, is one on which one
must say either very little or very much. I have had to follow the first course here.

I have treated the problem at more length in ‘Inequality in Agriculture— Problem
andProgramme', J. J. Morrison Memorial Lecture, Ontario Agricultural College,
Guelph, Canada, 1956.

THE NEW POSITION OF POVERTY 259

Here is a paradox. When we begin to consider the needs of those
who are now excluded from the economic system by accident,
inadequacy, or misfortune— we find that the normal remedy is to
make them or their children productive citizens. This means that
they add to the total output of goods. We see once again that even
by its own terms the present preoccupation with material as opposed
to human investment is ineflScient. The parallel with investment in
the supply of trained and educated manpower discussed above' will
be apparent.

But increased output of goods is not die main point. Even to the
most intellectually reluctant reader it will now be evident that
enhanced productive efficiency is not the motif of this volume. The
very fiict that increased output offers itself as a by-product of the
effort to eliminate poverty is one of die reasons. No one would be
called upon to write at such length on a problem so easily solved as
that of increasing production. The main point lies elsewhere. Poverty
—grim, degrading, and ineluctable— is not remarkable in India. For
few the fate is otherwise. But in the United States die survival of
poverty is remarkable. We ignore it because we share with all
societies at all times the capacity for not seeing what we do not wish
to see. Anciendy this has enabled the nobleman to enjoy his dinner
while remaining oblivious to die beggars around his door. In our
own day it enables us to travel in comfort through south Chicago
and the South. But while our fiiilure to notice can be explained, it
cannot be excused. ‘Poverty’, Pitt exclaimed, ‘is no disgrace but it is
damned annoying.’ In the contemporary United States it is not
annoying but it is a disgrace.

' Chapter XDC.

CHAPTER TWENTY-FOUR

Labour, Leisure, and the New Class

In a society of high and increasing affluence there are three plausible
tendencies as regards toil. As the production of goods comes to seem
less urgent, and as individuals are less urgently in need of income for
the purchase of goods, they will work fewer hours or days in the
week. Or they will work less hard. Or, as a final possibihty, it may
be that fewer people will work aU the time.

In the last century a drastic decline has occurred in the work week.
In 1850 it is estimated to have averaged just imder seventy hours, the
equivalent of seven ten-hour days a week or roughly six at from six
in the morning to six at night. A hundred years later the average was
forty hours or five eight-hour days.^

Tliis decline reflects a tacit but unmistakable acceptance of the
declining marginal urgency of goods. There is no other explanation.
However, such is the hold of production on our minds that this
explanation is rarely offered. The importance and rewards of leisure
are urged, almost never the unimportance of goods. Or, since pro-
duction per hour has been increasing as the work week has declined,
it is said that we are able to reduce the work because more is pro-
duced in less time. No mention is made of the fact that even more
would be produced in more time. Or, finally, the decline is related to
the feeling that steps must be taken to share the available work as
productivity per worker rises. This also implies that the marginal

Frederic Dewhurst and Associates, Americas Needs and Resources, A New
Survey, p. 1053. These figures are the weighted average of agricultural and non-
agricultural workers. The average work week in non-agricultural enterprise in
1950 was estimated to be 38*8 hours.

^>60

26 i

LABOUR, LEISURE, AND THE NEW CLASS

urgency of production is low or negligible, but again the point
remains unmade.

A reduction in the work week is an mcceedingly plausible reaction
to the declining marginal urgency of product. Over the span of
man’s history, although a phenomenal amount of education, per-
suasion, indoctrination, and incantation have been devoted to the
efibrt, ordinary people have never been quite persuaded that toil is as
agreeable as its alternatives. Thus to take increased well-being partly
in the form of more goods and pardy in the form of more leisure is
unquestionably rational. In addition, the institution of overtime
enables the worker to go far to adjust work and income to his own
taste and requirements. It breaks with the barbarous uniformity of
the weekly wage with its assumption that all families have the same
tastes, needs, and requirements. Few things enlarge the liberty of the
individual more substantially than to grant him a measure of control
over the amount of his income.

Unfortunately in the conventional wisdom the reduction in hours
has emerged as the only legitimate response to increasing affluence.
This is at least pardy because the issue has never been ficed in terms
of the increasing unimportance of goods. Accordingly, though we
have attributed value to leisure, a ban still lies on other courses which
seem to be more directly in conflict with established attitudes on
productive efficiency. In a society rationally concerned with its own
happiness these alternatives have a strong claim to consideration.

II

The first of these is that work can be made easier and more pleasant.

The present-day industrial establishment is a great distance re-
moved fiom that of the last century or even of twenty-five years ago.
This improvement has been the result of a variety of forces— govern-
ment standards and fiictory inspection; general technological and
architectural advance; the &ct that productivity could be often in-
creased by substituting machine power for heavy or repetitive manual
labour; the need to compete for a labour force; and union interven-
tion to improve workii^ conditions in addition to ws^es and hours.

However, except where the improvement contributed to increased

262

THE AFFtUENT SOCIETY

productivity, the effort to make work more pleasant has had to sup-
port a large burden of proof. It was permissible to seek the elimina-
tion of hazardous, unsanitary, unhealthful, or otherwise objection-
able conditions of work. The speed-up might be resisted— to a point.
But the test was not what was agreeable but what was unhealdiful
or, at a minimum, excessively fatiguing. The trend toward increased
leisure is not reprehensible, but we resist vigorously the notion that a
man should work less hard while on the job. Here older attitudes are
involved. We arc gravely suspicious of any tendency to expend less
than the m aximu m effort, for diis has long been a prime economic
virtue.

In strict logic there is as much to be said for making work pleasant
and agreeable as for shortening hours. On the whole it is probably as
important for a wage-earner to have pleasant working conditions as
a pleasant home. To a degree, he can escape the latter but not the
former— though no doubt the line between an agreeable tempo and
what is flagrant feather-bedding is difficult to draw. Moreover, it is a
commonplace of the industrial scene that the dreariest and most
burdensome tasks, requiring as they do a minimum of thought and
skill, frequently have the largest numbers of takers. The solution to
this problem lies, as we shall sec presently, in drying up the supply of
crude manpower at the bottom of the ladder. None the less the basic
point remains: the case for more leisure is not stronger on purely
prima facie grounds than the case for making labour-time itself more
agreeable. The test, it is worth repeating, is not the effect on produc-
tivity. It is not seriously argued that the shorter work week increases
productivity— that men produce more in fewer hours than they
would in more. Rather it is whether fewer hours are always to be
preferred to more but more pleasant ones.

Ill

The fliird of the obvious possibilities with increasing affluence is for
fewer people to work. This tendency has also been operating for
many yean although in a remarkably divene form. Since 1890, when
one boy in four and one girl in ten between the ages of ten and fifteen
were gainfully employed, large numben of juveniles have been

LABOUK, LEISURE, AND THE NEW CLASS 263

retired from the labour force and their number now is negligible. At
the same time a large number of women have been added. In 1890
19*5 per cent of the female population ten years and over was in the
labour force and by 1953 this proportion had risen to 29*7 per cent.^
However, this change reflects in considerable measure the shift of
tasks— food preparation, clothing manufacture, even cliild-rcaring—
out of the home. Women who previously performed them have
gone along to other work. The woman who takes charge of a day
nursery has joined the labour force, as have the women whose
children she cares for.

For seventy-five years the proportion of die male population in the
labour force lias been constant at around 75 per cent of those over
ten years of age. There are a smaller percentage of the very young
and of those over sixty-five, but this has been offset by the increase in
population in the ages between twenty and sixty-five where the
proportion of workers to the total is very high.*

With diminishing marginal urgency of goods it is logical that the
first to be spared should be old and young. We have yet, however, to
view this tendency consistently and comprehensively. We are able to
dispense with the labour of those who have reached retiring age
because the goods they add are of a low order of urgency, whereas a
poor society must extract the last ounce of labour e^rt fiom all. But
we have ordinarily subjected those who retire to a drastic reduction
in income and living standards. Obviously, if the retirement can be
af&rded because the product is no longer urgent, a satisfactory-
meaning for most purposes the customary— living standard can be
accorded to the retired employee for the same reason. Similarly we
have excluded youngsters from the labour market, partly on the
ground that labour at too early an age is unduly painful and injurious
to health, and pardy to make way for educational opportunity. But
while we have felt it possible to dispense with the goods that the
youngsters produce, we have yet to provide them, at least in full and
satis&ctory measure, with the education that their exemption firom
labour was designed to make possible. If we are affluent enough to
dispense with the product of juvenile labour, it again follows that we
are affluent enough to provide the education that takes its place.

* America's Needs and Resources, pp. 726^. * Ibid., pp. 725-<S.

THE AFFLUENT SOCIETY

264

In addition to releasing the old and yonng, it may be that we need
not use all of the labour force at all times. This possibility was ex-
plored in Chapter XVU. If the marginal urgency of goods is low,
then so is the urgency of employing the last man or the last million
men in the labour force. By allowing ourselves such slack, in turn,
we reduce the standards of economic performance to a level more
nearly consonant with the controls available for its management.
And in so widening the band of what is deemed tolerable perfor-
mance lies our best hope of minimizing the threat of inflation with its
further and persistent threat to social balance.

Such a step requires much more adequate provision than now for
those who are temporarily unemployed. We have seen, however,
that such measures are possible and, indeed, have a vital stabilizing
effect. And again such compensation accords with the logic of the
situation. If our need for production is of such a low order of urgency
that we can afford some imemployment in the interest of stability —a
proposition, incidentally, of impeccably conservative antecedents—
then we can afford to give those who are imemployed the goods that
enable them to sustain thdr accustomed standard of Hvii^. If we
don’t need what the unemployed do not make, we can obviously
afford them what they customarily eat and wear.

IV

However, the greatest prospect that we face— indeed what must now
be coimted one of the central economic goals of our society— is to
eliminate toil as a required economic institution. This is not a utopian
vision. We are already well on the way. Only an extraordinarily
elaborate exercise in social camouflage has kept us from seeing what
has been happening.

Nearly all societies at nearly all times have had a leisure dass— a
class of persons who were exempt from toil. In modem times and
especially in the United States the leisure class, at least in any identi-
fiable phenomenon, has disappeared. To be idle is no longer con-
sidered rewarding or even entirely respectable.

But we have barely noticed that the leisure dass has been replaced
by anodier and mudi larger dass to which work has none of the

LABOUR, LEISURE, AND THE NEW CLASS

265

older connotation of pain, fatigue, or other mental or physical dis-
comfort. We have failed to appreciate the emergence of this New
Class, as it may be simply called, largely as the result of one of the
oldest and most effective obfuscations in die field of social science.
This is the effort to assert that all work— physical, mental, artistic, or
managerial— is essentially the same.

This effort to proclaim the grand liomogeneity of work has com-
manded, for different reasons, the support of remarkably numerous
and diverse groups. To economists it has seemed a harmless and,
indeed, an indispensable simplification. It has enabled them to deal
homogeneously widi all of the different kinds of productive effort
and to elaborate a general theory of wages applying to all who receive
an income for services. Doubts have arisen from time to time, but
they have been suppressed or considered to concern special cases.^
The identity of all classes of labour is one thing on which capitalist
and communist doctrine wholly agree. The president of the corpora-
tion is pleased to think that his handsomely appointed office is the
scene of the same kind of toil as the assembly line and that only the
greater demands in talent and intensity justify his wage differential.
The communist offico-holder cannot afford to have it supposed that
his labour differs in any significant respect fi:om that of the comrade
at the lathe or on the collective farm vdth whom he his ideologically
one. In both societies it serves the democratic conscience of the more
favoured groups to identify themselves with those who do hard
physical labour. A lurking sense of guilt over a more pleasant, agree-
able, and remunerative Ufe can often be assuaged by the observation
‘I am a worker too* or, more audaciously, by the statement that
* mental labour is far more taxing than physical labour*. Since the
man who docs physical labour is intellectually disqualified from
comparing his toil with that of the brainworker, the proposition is
uniquely unassailable.

^ Marshall defined labour as ‘any exertion of mind or body undergone partly or
wholly with a view to some good other than the pleasure derived directly from the
work’ {Principles of Economics, p. 65). This definition obviously recognizes a
category of individuals for whom work is a reward in itself. However, this group,
having been introduced, plays little or no further part in Marshall’s analysis. It has
played almost no formal role in economic theory since.

266

THE AFFLUENT SOCIETY

In fact the differences in what labour means to different people
could not be greater. For some, and probably a majority, it remains
a stint to be performed. It may be preferable, especially in the con-
text of social attitudes toward production, to doing nothing. Never-
tiieless it is fatiguing or monotonous or, at a minimum, a source of
no particular pleasure. The reward rests not in the task but in the
pay.

For others work, as it continues to be called, is an entirely different
matter. It is taken for granted that it will be enjoyable. If it is not,
this is a source of deep dissatisfaction or frustration. No one regards
it as remarkable that the advertising man, tycoon, poet, or professor
who suddenly finds his work unrewarding should seek the counsel of
a psychiatrist. One insults the business executive or die scientist by
suggesting that his principal motivation in life is the pay he receives.
Pay is not unimportant. Among other things it is a prime index of
prestige. Prcstigc—dic respect, regard, and esteem of others— is in
turn one of the more important sources of satisfaction associated widi
this kind of work. But, in general, those who do this kind of work
expect to contribute their best regardless of compensation. They
would be disturbed by any suggestion to the contrary.^

Such is the labour of the New Class. No aristocrat ever contem-
plated the loss of feudal privileges with more sorrow than a member
of this class would regard his descent into ordinary labour where the
reward was only the pay. In the years following World War II a
certain number of grade-school teachers left their posts for substan-
tially higher-paid factory work. The action made headlines because it
represented an unprecedented desertion of an occupation which was
assumed to confer the dignity of the New Class. The college pro-

^ Wc have here an important reason why the income tax, despite high marginal
rates and frequent warnings of the damage these may do in impairing incentives,
has so far had no visibly deleterious effect. The surtax rates fall almost entirely on
members of the New Class. These are people who, by their own claim except when
they are talking about the effect of income taxes, are not primarily motivated by
money. Hence die tax, which also does not disturb the prestige structure-people
are rated by before-tax income— touches no vital incentive. Were high marginal
rates to be placed on (say) the overtime income of automobile workers, we would
expect a substantial withdrawal of effort. Here pay, as an incentive, remains
important.

LABOUR, LEISURE, AND THE NEW CLASS 267

fessor, who is more securely a member of the New Class than the
schoolteacher, would never contemplate such a change even as an
exercise in eccentricity and no matter how inadequate he might
consider his income.

In keeping with all past class bdiaviour, the New Class seeks ener-
getically to perpetuate itself. OflSpring are not expected to plan their
lives in order to make a large amount of money. (Those who go into
business arc something of an exception at least partly because income,
in business, is uniquely an index of prestige.) But from their earliest
years the children arc carefully indoctrinated in the importance of
finding an occupation from which they will derive satisfaction— one
which will involve not toil but enjoyment. One of die principal
sources of sorrow and frustration in the New Class is the son who
frils to make the grade— who drops down into some tedious and
unrewarding occupation. The individual who meets with this mis-
fortune— the son of the surgeon who becomes a garage hand— is
regarded by the community with pity not unmixed with horror. But
the New Class has considerable protective powers. The son of the
surgeon rarely does become a garage hand. However inadequate, he
can usually man^c to survive, perhaps somewhat cxiguously, on
the edge of his caste. And even if, as a salesman or an investment
counsellor, he finds little pleasure in his work, he will be expected
to assert the contrary in order to affirm his membership in the New
Class.

V

The New Class is not exclusive. While virtually no one leaves it,
thousands Join it every year. Overwhdmingly the qualification is
education.^ Any individual whose adolescent situation is such that

^ Political capacity is another qualification, and it is of espedal importance to
those who seek to make their escape after reachu^ their adult years. TIk intensity
of the campaigns for local political o£5ces— dty councillors, school committee-
men, sheriffi, and county supervisors— u to be erqrlained by diis fiurt as also is die
enduring interest in appointive political office. Ihose who are already members of
the New Class often ^ to see how such posts are valued as an entr&. Ihey look
askance at the competition for such posts between die less wdU-educated members

268

THE AFFLUENT SOCIETY

sufficient time and money are invested in his preparation, and who has
at least the talents to carry him through the formal academic routine,
can be a member. There is a hierarchy within the class. The son of the
factory worker who becomes an electrical engineer is on the lower
edge; his son who does graduate work and becomes a imiversity
physicist moves to the higher echelons; but opportunity for education
is, in either case, die open sesame.

There can be little question that in the last hundred years, and even
in die last few decades, the New Class has increased enormously in
size. In early nineteenth-century England or the United States, ex-
cluding the leisure class and considering the New Class as a group
that hved on what it has carefully called earned income, it consisted
only of a handful of educators and clerics, widi, in addition, a trifling
number of writers, journalists, and artists. In die United States of the
eighteen-fifties it could not liave numbered more than a few thou-
sand individuals. Now the number whose primary identification is
widi their job, radier than the income it returns, is undoubtedly in
the milhons.

Some of the attractiveness of membership in the New Class, to be
sure, derives from a vicarious feeling of superiority— another mani-
festation of class attitudes. However, membership in the class un-
questionably has other and more important rewards. Exemption
from manual toil; escape from boredom and condning and severe
routine; the chance to spend one’s life in clean and physically com-
fortable surroundings; and some opportunity for applying one’s
thoughts to the day’s work, are regarded as unimportant only by
those who take diem completely for granted. For these reasons it has
been possible to expand the New Class gready without visibly
reducing its attractiveness.

This being so, there is every reason to conclude that the further
and rapid expansion of this class should be a major, and perhaps next
to peaceful survival itself, the major social goal of the society. Since

of the community. They £ul to realize that such posts provide the greatest oppor-
tunity for such individuals and that it is upon such people that we depend for much
good (as well as some bad) dvic enterprise. The union is another important oppor-
tunity for the individual of political capadty. C£ the interesting sketches by
Harvey Swados in On the Line (Boston, Atlantic-little, Brown, 1957).

LABOUR, LEISURE, AND THE NEW CLASS 269

education is the operative factor in expanding the class, investment
in education, assessed quaUtatively as well as quantitatively, becomes
very close to being the basic index of social progress. It enables
people to realize a dominant aspiration. It is an internally consistent
course of development.

Recent experience lias shown that the demand for individuals in
the occupations generally identified with the New Class increases
much more proportionately with increased income and well-being.
Were the expansion of the New Class a deliberate objective of the
society this, with its emphasis on education and its ultimate edect on
intellectual, Hterary, cultural, and artistic demands, would greatly
broaden the opportunities for membership. At the same time the
shrinking in the number of those who engage in work qua work is
something to be regarded not alone with equanimity but with posi-
tive approval. For one of the inevitable outlets for the intellectual
energies and inventiveness of the New Class wUl be in finding sub-
stitutes for routine and repetitive manual labour. To die extent that
such labour is made scarce and more expensive, diis tendency will, of
course, be accelerated. To minimize the number of people doing
such work is the counterpart of the goal of expanding the New
Class.

It is a measure of how litde we need worry about the danger firom
reducing die number of people engaged in work qua work that, as
matters now stand, our concern is not that we will have too few
available for toil but too many. We worry lest such technical ad-
vances as automation, an already realized dividend of the expansion
of the New Class, will proceed so rapidly as to leave a surplus of
those who still work. This, indeed, could be the greater danger.

VI

I venture to suggest that the unprofessional reader will find rather
reasonable and rational the ideas here ofiered. Why should men
struggle to maximize income when the price is many dull and dark
hours of labour? Why especially should they do so as goods become
more plentiful and less urgent? Why should they not sedt instead to
maximize the rewards of all the hours of their days? And since tliis is

THE AFFLUENT SOCIETY

270

the plain and obvious aspiration of a great and growing number of
the most perceptive people, why should it not be the central goal of
the society? And now to complete the case, we have a design for
progress. It is education or, more broadly, investment in human as
distinct from material capital.

But in the more sopliisticated levels of the conventional wisdom,
including, regrettably, some professional economists, any such goal
will seem exceedingly undesirable. The production of material
goods, urgent or otherwise, is the accepted measure of our progress,
hivestment in material capital is our basic engine of progress. Both
this product and the means for increasing it are measurable and
tangible. What is measurable is better. To talk of transferring in-
creasing numbers of people from lives spent mostly in classical toil to
lives which, for the most part, are spent pleasantly has less quantita-
tive precision. Since investment in individuals, imlike investment in
a blast furnace, provides a product tliat can be neither seen nor
valued, it is inferior. And here the conventional wisdom unleashes
its epithet of last resort. Since these achievements are not easily
measured, as a goal they arc ‘fuzzy’. This is vwdely deemed to be a
fatal condemnation. The precise, to be sure, is usually the old and
familiar. Because it is old and familiar it has been defined and
measured. Thus does insistence on precision become another of die
tautological devices by which the conventional wisdom protects
itself. Nor should one doubt its power.

Yet anyone who finds this analysis and tiicse proposals sensible
should not be entirely discouraged. We are here in one of the con-
texts where circumstance has marched far beyond the conventional
wisdom. We have seen how general are the efforts to join the New
Class and how rapid is its expansion. We are not here establishing a
new economic and social goal but identifying one that is already
widely if but tacidy accepted. In this situation the conventional
wisdom cannot resist indefinitely. The economist of impeccable cre-
dentials in die conventional wisdom, who believes that there is no
goal in life of comparable urgency with the maximizadon of total
and individual real income, would never think of applying such a
standard to himself. In his own life he is an exponent of all the
aspirations of the New Class. He educates and indoctrinates his diil-

LABOUR, LEISURE, AND THE NEW CLASS 27I

dren with but one thing in mind. It is not that they should maximize
their income. This is abhorrent. He wants above all that they will
have an occupation that is interesting and rewarding. On this he
hopes, indeed, that they will take their learned parent as their model.

CHAPTER TWENTY-FIVE

On Security and Survival

In our society die increased production of goods— privately pro-
duced goods— is, as we have seen, a basic measure of social acliieve-
ment. This is pardy the result of the great continuity of ideas which
links the present with a world in whicli production indeed meant
life. Partly it is a matter of vested interest. Partly it is a product of the
elaborate obscurantism of the modem theory of consumer need.
Partly it reflects an erroneous view of the problem of national
security. And partly, we have seen, the preoccupation with produc-
tion is forced quite genuinely upon us by tight nexus between
production and economic security. However, it is a reasonable
assumption that most people pressed to explain our concern for pro-
duction— a pressure diat is not often exerted- would be content to
suggest that it serves die happiness of most men and women.
That is sufEcient.

The pursuit of happiness is admirable as a social goal. But the
notion of happiness lacks philosophical exactitude; there is agreement
neither on its substance nor its source. We know that it is ‘a profound
instinctive union with the stream of life\^ but we do not know what
is united. As just noted, precision in scholarly discourse not only
serves as an aid in the communication of ideas, but it acts to eliminate
unwelcome currents of thought, for diese can almost invariably be
dismissed as imprecise. To have argued simply that our present pre-
occupation with production of goods does not best aid die pursuit
of happiness would have got nowhere. The concepts to which

^ Bertrand Russell, The Conquest of Happiness (London, Allen & Unwin, 1930),
p. 248.

272

ON SECURITY AND SURVIVAL 273

one would have been committed would have been far too vague.

Any direct onslaught on the identification of goods with happiness
would have had another drawback. Scholarly discourse, hke bull-
fighting and the classical ballet, has its rules and they must be
respected. In this arena nothing counts so heavily against a man as to
be found attacking the values of the public at large and seeking to
substitute his own. Technically his crime is arrogance. Actually it is
ignorance of the rules. In any case he is automatically removed from
the game. In the past this has been a common error of those who have
speculated on the sanctity of present economic goals— those who
have sought to score against materialism and PhiHstinism. They have
advanced their own view of what adds to hmnan happiness. For this
diey could easily be accused of substituting for the crude economic
goals of the people at large die more sensitive and refined but
irrelevant goals of their own. The accusation is fatal.

Tlie reader will now appreciate die care with which the defences
against such an attack have been prepared. The question of happiness
and what adds to it has been evaded, for indeed only mathematicians
and participants on radio quiz programmes arc required to solve
problems that can as sensibly be sidestepped. Instead, the present
argument has been directed to seeing how extensively out present
preoccupations, most of all that with the production of goods, are
compelled by tradition and by myth. Released from these compul-
sions we become free for die first time to survey our other oppor-
tunities. These at least have a plausible relation to happiness. But it
will remain with the reader, and ultimately one hopes with the
democratic process, to reconcile these opportunities with his own
sense of what makes life better.

II

A society has one higher task than to consider its goals, to reflect on
its pursuit of happiness and harmony and its success in expelling pain,
tension, sorrow, and the ubiquitous curse of ignorance. It must also,
so fiur as this may be possible, ensure its own survival.

The ideas wi^ which this essay is concerned bear heavily on this
considerable goal. The survival of a society rests on the same fiictors

274

THE AFFLUENT SOCIETY

which make its survival worth while, for the simple but compelling
reason that illusion is the enemy of both.

The point is not difficult to make. Nor, as compared perhaps with
other things in the book, will persuasion be too difficult. This is
another area where circumstance— in this instance at almost terrifying
speed— has been undermining the conventional wisdom.

More specifically, as this is written (at the end of 1957) it is nearly
two years since Chapter XII on the economics, so-called, of national
security was first drafted. At that time it seemed hard to believe that
people might soon be persuaded that crude increases of production
had little to do with national defence and that the attitude that
stressed such calculations was positively damaging.

Since then the Soviet Union has revealed a breath-taking series of
scientific and tccluiical advances. No one or at least not many have
suggested diat she was handicapped in doing so by too small a Gross
National Product. Tliose who once talked so resonantly of produc-
tion have been silent, at least on this subject. It has become evident
that our failure to match this achievement was the result of the &ilure
to concentrate the requisite resources on the desired ends. Some have
even pointed out that in the same week the Russians launched the
fint earth satellite we launched a magnificent selection of car models
including the imiquely elegant new Edscl. The lesson was not com-
pletely learned. Too much was attributed to fortuitous factors—
unwise budget cuts, the perverse personality of the Secretary of
Defence, interscrvice conflict, and generally poor administration.
We have not yet seen that the causes were far deeper— that our
economy, and the economic theory that explains and rationalizes its
behaviour, immobilizes all but a minor fraction of the product in
private and, fi:om the standpoint of national security, irrelevant pro-
duction. We have not seen that the problem is far more dian one of a
bigger budget— that it is one of our attitude toward the goals of the
society itself. A society which sets as its highest goal the production
of private consumer goods will continue to reflect such attitudes in all
its public decisions. It wiU entrust public decisions to men who regard
any other goal as incredible— or radical. We have yet to see that not
the total of resources but their studied and rational use is the key to
achievement.

ON SECURITY AND SURVIVAL

275

There would seem to me even a likelihood that one branch of the
conventional wisdom will react to arguments such as those here
advanced by saying that they are inappropriate in a world of tension.
Production, it will be said, is still our problem— and how much
more so in the cold war. It will be said, in effect, that we must con-
tinue to avoid any reflection on what we are producing. The urgency
of our situation requires that we remain blind. To contemplate what
might better our happiness would be a diversion. We must continue
to expend our energies on what does not. To reflect on the relation
of our resource use to security and survival would take our minds
away from producing what we do not urgently need.

Ill

The nature of the deployment of the resources that would best serve
our survival is beyond die scope of this essay. For myself I have little
fliith in the safety or security which derives from a never-ending
arms race— from a competition to elaborate ever more agonizing
weapons and to counter those of the enemy. If the possibility exists,
the risks of negotiation and setdement, however great these may be,
would still seem to provide a better prospect for survival than reli-
ance on weapons which we can only hope are too terrible to use.

But whatever the paths to survival, the problem is the same. Were
the Russians to disappear from the world, or become overnight as
tractable as church mice, there would remain vast millions of hungry
and discontented people in the world. Without the promise of relief
from that hunger and ptivadon, disorder would still be inevitable.
The promise of such relief requires that we have available or useable
resources. The requirement is, of course, much more urgent in a
world in which diflering economic and political systems are in com-
petition.

Even when the arms race ends, as it must, the scientific and techno-
logical frontier will remain. Either as an aspect of international com-
petition, or in pursuit of the esteem and satisfliction which go widi
discovery, we shall want to seek to cross it and be in on the crossing.
In the field of consumer satisfretion, as we should by now agree,
thore is Utde on which one can fiiult the American performance. But

276 THE AFFLUENT SOCIETY

this is not all and, as we should now, hopefully, also agree, an eco-
nomy that is preoccupied however brilliantly with the production of
private consumer products is supremely ill fitted for many of these
frontier tasks. Under the best of circumstances its research will be
related to these products rather than to knowledge. The conven-
tional wisdom will provide impressive arguments to the contrary.
No one should be fooled.

And not only does a great part of modem scientifre work lie out-
side the scope of the market and private enterprise but so does a
large area of application and development. Private enterprise did not
get us atomic energy. It has shown relatively slight interest in its
development for power for the reason that it could not clearly be
fitted into commercial patterns of cost and profit. Though no one
doubts the vigour with which it addresses itself to travel within the
United States, General Motors has little interest in travel through
space.

As matters now stand, we have almost no institutions that are by
central design and purpose directed to participation in modem
scientific and technological progress and its large-scale application.
We have no organization capable, for example, of taking on the
large-scale development of atomic power generators or radically
new departures in passenger-carrying aircraft in advance of know-
ledge that these will be commercially feasible. Much has been accom-
plished by research and development, not immediately subject to
commercial criteria, under die inspiration of military need. This has
done more to save us from the partial technological stagnation that is
inherent in a consumers’ goods economy than we imagine. But it is
also a narrow and perilous prop, and it has die further effect of
associating great and exciting scientific advances widi an atmosphere
of fear and even terror.

IV

Nor is this all. The day will not soon come when the problems of
eidier the world or our own polity are solved. Since we do not know
the shape of the problems we do not know the requirements fr>r
solution. But one diing is tolerably certain. Whether the problem be

ON SECURITY AND SURVIVAL

277

that of burgeoning population and of space in which to live with
peace and grace, or whether it be the depletion of the materials
which nature has stocked in the earth's crust and which have been
drawn upon more heavily in this century than in all previous time
together, or whether it be that of occupying minds no longer com-
mitted to the stockpiling of consumer goods, the basic demand on
America will be on its resources of abiHty, intelligence, and educa-
tion. The test will be less the effectiveness of our material investment
than the effectiveness of our investment in men. We live in a day of
grandiose generaUzation. This one can be made with confidence.

Education, no less than national defence or foreign assistance, is in
the pubhc domain. It is subject to the impediments to resource
allocation between private and public use. So, once again, our hope
for survival, security, and contentment returns us to the problem of
guiding resources to tlic most urgent ends.

To furnish a barren room is one thing. To continue to crowd in
furniture until the fotmdation buckles is quite another. To have
failed to solve the problem of producing goods would have been to
continue man in his oldest and most grievous misfortune. But to fail
to see that we have solved it and to fail to proceed thence to the next
task would be fully as tragic.

INDEX

A.A.F., 128

Abramovitz, Moses, 98 n.

Affluence, and economic preoccupa-
tions, 61; economic security, 85;
employment, 227; in Europe, 1-2,
26; ideas, 1-3, 112; inflation, 185, 194;
problems of, 226, 256; in United
States, 1-2, 26, 47-8; want creation,
124, 194. See also Wealtli

Affluent society, and depression, 236-7;
income, 256; sales tax, 245-7; social
balance, 199-201, 250; work, 260-2
AFL.6

Agriculture, in Appalacliians, 254 n.;
in Canada, 89; farm income, 253-4;
and Keynes, 147; poverty of, 252-3;
prices in depression, 35, 88; and pure
competition, 167; research in, 9c>-ioo;
support prices, 82, 86, 89, 92; sur-
pluses, 220; in United States, 89, 114;
universal risk insurance, 89. See abo
Farmers

Agriculture, Department of, 205

Alcott, William A., 225 n.

Aldrich, Winthrop, 72

American Assembly, 14

American Farm Economic Associa-
tion, 88 n.

American Revolution, 20 n.

Americans for Democratic Action, 96,
150; ADA World, 149 n.

Antitrust laws, 75, 103, 169 n.

Appalachians, 253, 254 n.

Arkwright, Richard, 211

Asia, 21, 26
Assassins, 69-70
Australia, 26

Automobile instalment credit 1955-6,

159

Bank of England, 176-7
Bank rate, 176; in Britain, 176-7
Batten, Barton, Durstine and Osborn,
123

Beckerman, W., 109
Beecher, Henry Ward, 45
Bellamy, Edward, 40
Bengal, 245
Benson, Ezra Taft, 221
Bentham, Jeremy, 224
Beveridge, William (Lord), 11
Bierce, Ambrose, 256
Blough, Roger, 75 n.

Boumeuf, Alice, 64 n.

Brandt, Karl, 88-9
Bricker, John W., 145
Brown, E. H. Phelps, 16 n.

Browning, Robert, 151
Budget, balanced, 11-13, 148; cutting,
188; deficit, 53 ; in depressions, 11-13 ;
surplus, 186-7
Built-in stabilizers, 92
Bums, Arthur F., 208 n.

Business, borrowing, 160, 180, 181,
233, 183; in depression, 87; economic
security, 78-83, 86-7; inflation, 172-4
206; monetary policy, 183-4, 186;
New Class, 266-7; research, 99-100;

278

INDEX

Veblen, 41. See also Investment
Business cyde, 34-6, 52 n., 82-3, 147-8,
190, 231-2
Business Week, 152

Businessman, and conventional wis-
dom, 8, 9; in depressions, 35; as eco-
nomic force, 6, 73; vs. economists,
75; and equality, 65; European vs.
American, 88; hostility to govern-
ment, 144; and intellectuals, 144-6,
152-3; in modem corporation, 69-
70; and prestige, 151-3; and prices,
170; and production, 96, 142-6, 151,
153, 154; and public officials, 152;
and social security, 78, 81; and taxes,
63, 151; in Washington, 133-4, ^3^

Cairncs, J. F., 18 n.

California, real estate speculation in,
39

Canada, 85, 89
Cannes, 72

Capital, free flow of, 212; material,
210, 212-13, 216, 269-70; personal,
210, 212-14, 216, 248, 269-70
Capital formation, 62, 63-4, 107; de-
fined, 210; in England, 63, 102;
Norway, 63; as index of economic
growth, loo-ioi
Capital gains, 66, 245
Capitalism, 89; Marx’s views of, 50-1,
56, 89

Carey, Henry Charles, 37-8, 40 n.,
42

Carlyle, Thomas, 20
Carnegie, Andrew, 29, 152
Carnegie Corporation, xi
Carney, Stephen}., 143
Cartels, 79
C.G.C., 232-39
ChcvalHcr, Gabriel, 153
Chicago, 96, 259
China, 74

279

Churchill, Sir Winston, 58 n., 149
CIO, 6

Civil War, 16, 29, 33
Clark, John Bates, 113
Class conflict, 54, 55
Clcmence, Richard V., 35 n.
Clochemerle, 153
Coefficients, 197

Commager, Henry Stcclc, 42 n.
Commons, Jolm R., 40 n.
Communism, 14, 62, 129, 265
Communist party, 96; and inflation, 207
Competition, 30-3, 165, 16711., 169-71,
187; in Britain, 176; insecurity of
competitive model, 59-60, 77, 79-84;
pure, 167; Social Darwinism, 47-9
Congress, 14, 162, 177, 188, 204
Connecticut, 254

Conservatives, and balanced budget,
148; full employment, 150; and
government, 148; inequality, 203-4,
244; inflation, 164, 165, 189; mone-
tary policy, 186, 194; production, 76,
194; security, 78, 83; taxes, 65, 189,
204, 244, 245, 248-9
Consumer borrowing, 180, 18 1
Consumer credit, 158-60, 162-3, 180-1;
in United Kingdom, 162; in United
States, 162

Consumer debt, and CGC, 237; crea-
tion of, 156, 159-60, 217; dangers of,
158-61, 162; increase in, 156-7, 162;
view of, 156

Consumer demand, 117; and debt, 155,
162; interest rate, 180; production,
120-2; theory of, 112-13, 124-5,
142, 151, 154; unsolved problem, 194
Consumer need, theory of, 272
Consumer saving, 158, 179 n.
Consumer spending, 160, 184; and
fiscal poUcy, 190; and inflation, 181;
in Korean war, 136-7; and mone-
tary policy, 181

28 o

INDEX

Consumer want creation. See Depen-
dence effcrt, Want creation
Controlled Materials Plan, 134
Conventional wisdom, 6, 14-15, 125,
226; balanced budget, 11-13, 148;
and business executive, 8, 9; civilian
morale, 134-5; constructive criticism,
218; and consumer borrowing, 159;
consumer demand, 1 19-20, 123; and
controls, 238-9; depressions, 166;
and events, 10, 13, 15, 178; federal
appropriations, 204; Federal Re-
serve, 177; and fiscal policy, 190; and
inequality, 64, 65-6, 76; inflation,
165; international affairs, 128; and
Keynes, 118, 149-51; of liberals and
conservatives, 6-7; of Marxists, 58;
and military policy, 128-31, 134-6,
139; and monetary policy, 178, 185;
and production, 76, 89-91, 96, 99,
105, no, 131, 135, 2I9~2I, 229, 274,
276; and the public official, 8-9;
public services, 106, 202-3; and re-
search, 216; scholarship, 7-9; security,
77-9, 85. 87-90, 92-3, 156; and
stable prices, 164; structure of in-
centives, 174; and survival, 274, 275;
taxes, 243, 248-9; technological
advance, 21 1; work, 261, 270
Corporation, 47, 56, 88, 91, 102, 167-8,
222, 223-4; business executive in,
I43f 152-3; and depression, 154;
monetary policy, 183-4; and organi-
zation man, 208-9; prices, 81-2,
169-70, 183; regulation of, 147-8;
and research, 99

Countervailing power, 31 n., 167 n.
Croffiit, W. A., 71 n.

Cyclically Graduated Compensation.
See C.G.C.

Darwin, Charles, 44
Deauville, 72

Defence, Department of, 137
Delmonico’s, 45

Demand, and C.G.C., 231; controls,
191; fiscal policy, 187, 190-2; in-
flation control, 175; private goods,

249

Democrats, 95, 96, 149
Dependence effect, 124, 135; defini-
tion of, 124; and production, 125;
public services, 202
Depew, Chauncey, 46
Depiction allowance, 66, 245
Depression, 11-12, 33-6, 39-40, 41,
51-2, 55, 57t 59, 82-3, 85, 103. 107,
147, 165, 206, 220, 227, 229-30, 232;
and C.G.C., 237; economic security,
loi, 154; inefficiency of, 87, 90-2,
loi; and monetary policy, 185;
public services, 207; as sclfcorrcct-
ing, 165; and taxes, 188. See also
Great Depression
Destutt dc Tracy, A., 51
Dewhurst, J. Frederic, 90 n., 260 n.,
263 n.

Diaspora, 224

Direct controls, 192-3. See also Prices,
Wages

Dorfinan, J., 38 n.

Douglas, Lewis W., 13
Duesenberry, James S., 121
Du Pont (E. I du Pont dc Nemours
and Company), 208

East India Company, 21
Economic security, and consumer
credit, 162; inflation, 166, 175; mone-
tary policy, 183 ; preoccupation with,
87-8; production, 88-91, 93, 151,
154-6; in thirties, 83
Economic stabilization, 170 n.; as
public policy, 82

Economics, American tradition in, 37;
central tradition, 18, 25, 27-8, 30, 32,

INDEX 281

33-4* 35t 37* 58-60, 61-2, 78-9; Governors of, 66 n., 161; relation to

current problems, 111-12, 118, 251;
defence of production, 110-12; “Dis-
mal Science,’’ 20; formation of ideas
17-18; history of, 18-58; mterpreu-
tion of behaviour, 5-6; obsolescence of
central ideas, 3; preoccupation with
productivity, inequality, and inse-
curity, 60; wealth of national com-
munities, 16
Eden, Sir Anthony, 149
Edsel, 274

Education, 277; investment in, 269.

See also Social Balance
Eisenhower, Dwight David, 65
Eisenhower Administration, 144, 149
Employment, as basic economic con-
cern, 227; level of, 244 n.; See also
Full employment. Unemployment
England, economic conditions, 16, 17,
18, 20, 24-5, 70; economic discus-
sion, 26; housing, 201; Industrial
Revolution, 211; of Marshall, 251;
and New Class, 268; public wages,
206; rate of capital formation, 63;
Ricardo, 114; Social Darwinism, 44;
social legislation, 45; Stuarts, 242
Excise tax, 204

Factory Acts, 11
Fair Trade laws, 81

Farmers, aid to, 147, 162; in com-
petitive market, 169-70, 183; in-
come in fifties, 68; and inflation, 172;
monetary policy, 183; production,
225; security, 80, 81, 84, 85, 86-9,
1 54; See ako Agriculture
F.B.L, 264

Federal government, and defence,
243; inflation, 205-6; social balance,
205-6, 243. 245; taxes, 204-5, 243-
4

Federal Reserve System, Board of

government, 177
Feudalism, 24, 100, 266
Fiscal policy, 186, 194; consumer
spending, 190; income inequality,
189; inflation, 187, 194; investment,

190- 1; market structure, 187; politics,

191- 2; prices, 186, 191-2; production,
189-91; unemployment, 190; wages,
187

Florida, 91

Ford, Henry, 84, 152, 210
Ford Motor Company, 84
Forsytes, 86

France, 206, 246; French army, 128
Franklin, Benjamin, 211
Freemarket, controls, 192-3; inflation,

166, 174-5

Free trade, in Britain, 176
Full employment, 149-50, 191, 194,
220, 227, 229-34. 235-6, 238; defini-
tion of, 167 n.; as norm, 190; price
stability, 174

Galbraith, Catherine A., xi
Galbraith, John Kenneth, 31 n., 33 n.,
167 n., 170 n., 258 n.

General Electric Company, 47, 81
General Motors Corporation, 9, 47,
81, 137* 276

General Property Tax 205, 246
Genghis Khan, 17
George, Henry, 38-40
Germany, 17, 126-8, 130 n., 219;

social insurance in, 85
Goering, Hermann, 126
Goldsmith, Selma, 67 n.

Gorer, Geoffrey, 96 n.

Gould, Jay, 71

Gray, Alexander, 21 n., 38 n.

Great Britain, and bank rate, 176-7;
liberalism, 146; production, 19th
century, 102; social insuiance, 85;

282

INDBX

unemployment, 93 ; war produc-
tion, 128 n. See also England
Great Depression, 33-7, 42, 56, 71, 147;
and agriculture, 220; balanced bud-
get, 12-13; government interven-
tion, 165-6; monetary policy, 177;
security, 85-6; in United States and
Canada, 85

Gross National Product, 91, 95, 104-5,
129, 130, 136, 196. 199. 274
Guggenheim Foundation, John Simon
Guggenheim Memorial Foundation,
xi

Haileybury College, 21
Hamburg, 126-7, 128, 131, 124
Hamilton, Alexander, ii
Hamlet, 171
Hansen, A. H., 160 n.

Harberger, Arnold C., loi n.
Hargreaves, James, 211
Harriman, Avercll, 72
Harriman, £. H., 69
Harris, Seymour £., xi-xii, 104 n.
Harvard University, xi, 28
Hayek, F. A., 208 n.

Haynes Foundation, California Insti-
tute of Technology, xi
Hcarst, William Randolph, 69
Henry of Champagne, 69
Hill, James J., 69
Hiroshima, 126
Hitler, Adolf, 126
Hofstadter, Ridiard, 45 n., 46 n.
Holland, 16, 201
Hollywood, 152, 200
Holmes, Justice Oliver Wendell,
45

Honolulu, 173-4
Hoover, Herbert, 12, 13, 147
Hopkins, Sheila, V. 16 n.

Hottentots, 221

Housing, and social balance, 200-1

Hiunan development, external eco-
nomy of, 213-14; See also Invest-
ment, New Class

Humphrey, George M., 53 n., 181-2,
181

Imperialism, Marxian view, 54

Income, in affluent society, 257; agri-
cultural, 68, 253; as basic economic
concern, 227; and C.G.C., 237; in
fifties, 66, 157-8, 252-3; in inflation,
205-7; and liberty, 261; and New
Class, 266, 269, 271; for 1928 to 1950.
67; from private goods, 241-2; and
production, 227-8, and public acti-
vity, 241-2; redistribution of, 61,
74-5, 147; and Ricardo, 22; rise in
vs. inequality, 68, 70; and tax policy,
64-5; in 20tii century, 75 n.

Income tax, 62-6, 75, 147, 162, 189,
203-4, 223, 243-5, 247-9

India, 72, 74. 84, i97. 246, 259

Industrial Revolution, 17, 85, 21 1

Industry, conversion to war, 128; in
United States, 211; in World War
I, 130 n.

Inequality, 59-60, 244-5, 256; case for,
62-3, as economic issue, 64-8, 143,
203; in economic tradition, 61-2;
and income tax, 62, 66, 203-4, 244;
preoccupation with, 60-1; and social
balance, 203-4

Inflation, 218; consequences of, 173;
control of, 174-5. 178-9. I94. 238;
and countervailing power, 167 n.;
dangers, 194, 228; and expenditures,
187-9; farmers, 172; fis^ policy,
187-9, 194; and income, 171 n.,

205- 7; investment, 182; Korean war,
136-7; monetary policy, 166, 179,
181-3, 194; and production, 155-^.
167-8, 182; public employment,

206- 7; public services, 187-8; reme-

INDEX 283

dies for, 165-6, 168, 174, 193, 194;
responsibility for, 172; and social
balance, 203, 205-6, 228, 237; taxes,
187-8, 191; unemployment com-
pensation, 231; and unions, 172, 174;
in United States, 164; and wages,
i 69 - 7 I» 174-5

Inland Steel Company, 88 n.
Input-output, 197

Interest rate, 176, 178, 179-81, 182-4
International trade, 33-4
Investment, by business, 160, 180,
181-5, 190; in education, 269-70;
funds, 212; in individuals, 212-16,
248, 257-9, 269-70, 277; in material
capital, 269-70, 277; in public do-
main, 213-16; rate of, 160
Iowa, 85

Iron law of wages, 19-20, 22-3, 26-7,

51

Italy, 206

Jaszi, George, 67 n.
jevons, William Stanley, 173
Johnson, Gale, 75 n.

Johnson, Dr. Samuel, 58
Joint Committee on the Economic
Report, 91 n.

Josephson, Matthew, 71 n.

Juvenile delinquency, 200

Kaitz, Hyman, 67 n.

Kay, John, 211
Kaysen, Carl, xi, 104 n.

Kendrick, Jolin W., 98 n.

Kent, James, ii
Kentucky, 85

Keynes, John Maynard (Lord), 13, 15,
16 n., 18 n., 83, 118, 120, 147, 149-
51, 165, 178, 186, 194, 220
Korean war, 136-7

Labour, 167; limiting production in

American economy, 100; natural
price of, 23 ; Vcblcn, 40-1
Labour force, 167, 169, 229-31, 234-6,
237, 262-4, 337-39

Labour productivity, 196; data on, 89-90

Labour party, in Britain, 149

La Follette, Robert, ii

Lake States, 253

Lawrence, 223

Lelunan, Herbert, 72

Lend Lease, 133 n.

Leontief, Wassily, 197
Liberalism, in Britain and United
States, 1 90-1; concept of liberal
state, lo-ii, 19; conventional wis-
dom, 7, ii; liberal economic society,
24, 105

Liberals, and economic security, 83,
employment, 149-50, 191; expand-
ing economy as goal, 76; fiscal
policy, 186, 189, 191, 194; inequality,
63-4; inflation, 164-5, I9i; poverty,
255-6; production, 146-51, 194;
programme in America, 146-8;
public services, 207; social balance,
203, 243-5; social security in U.S.,
78; taxes, 65, 204, 244-7, 248-9
liebenberg, Maurice, 67 n.

Little, I. D. M., 113 n.

Lloyd, Henry Demarest, 40
Lloyd, George David, ii
Locker, v. New York, 45 n.

Los Angeles, 96, I15. I 35 . I 99
Lowell, 223

LudendorflT, Erich, 130 n.

Lynes, Russell, 152 n.

Macmillan, Harold, 149
M. A. Hanna Company, 137
Madison Avenue, 200, 242
Maginot Line, 128

Malthus, Thomas Robert, 20 - 4 » 26, 33,
43, 84, 102

INDEX

284

Marginal cost, 167 n.

Marginal productivity theory, 27, 29,
59

Marginal utility, 115-16; doctrine of
diminishing, 114-15, 118
Market behaviour, theory of, 86
Marshall, Alfred, 27, 28, 30, 32, 115,
251, 252, 265 n.

Martin, Bradley, 45
Marx, Karl, 19, 20, 25, 33, 34. 38. 42,
50-60. 89, 105,

Marxians (Marxists), 19, 53, 55-8, 60,
62, 64, 66, 89,

Materialism, 55, 350
Maytag, Fred 11 , 63 n., 65 n.

Mazur, Paul, 159 n.

Menger, Karl, 113
Mercantilism, 24
Miami Beach, 72

Middle Bast, 74; display of wealth, 72;
economic life, 17; rate of capital
formation, 64

Mill, John Stuart, 18 il, 24, 27, 37
Mills, C. Wright, 71 n.

Mises, Ludwig von, 145 n.

Mississippi River, 253
Mitchell, Wesley C., 35, 40 n.
Mohammed, 50

Monetary policy, 176; agriculture, 183;
bank borrowing, 180; of bankers,
177-8; business investment, 181-4,
i93-4> 208; competitive market,
183-4, 187; consequences of, 184-5;
consumer borrowing and spendii^,
180-2; definition of, 166; economic
security, 183, 185; Great Depression,
177; inflation, 179-80, 183, 194;
interest rate, 179-81, 182-3; large
and small firms, 183-4, 187; mystery
of, 177; prices, 181, 183-4, 185; pro-
duction, 181-3; revival of; 17^;
supply of money, 179-80; wage-
price interaction, 179

Money supply, 179-80
Monopoly, 30, 32, 41, 79, 101-2
Morgan,}. Pierpont, 69, 71, 72, 152
Munoz-Marin, Governor Luis, xii

Napoleon, time of, 129
The Nation, 42

National Association of Manidfacturers,
47. 57. 63 n., 96, 150, 249
National Bureau of Economic Rc-
seardi, 67 n., 98 n.

National defence, 277; and produc-
tion, 151. 154. 273-4; taxes, 243
New Class, 265, 266-71
New Deal, 43, 71, 83, 133, 221
The New Republic, 42, 129 n.

New York City, 45, 133, 195
New York state, labour legislation, 45
New Zealand, 26
Newport, Rliode Island, 45
Nice, 72

Nixon, Richard M., 237
North Dakota, 225
Norway, capital formation in 63-4
Nutter, G. Warren, 21 1 n.

Old age and survivor’s insurance, 92
Olds, R. E., 152

Ohgopoly, 167 n., 168, 171, 172, 174,
183. 184, 187
Ozarks, 253

Palais des Nations, xi
Palm Beach, 72
Pampas, 26
Pangloss, Dr., 56
Panic of 1907, 33
Parker, Cola G., 47
Parks, Ruth M., xi
Parliament, 241; acts of, 19
Patten, Simon N., 40 n.

Philistinism, 273
Pigou, A. C., z6o n.

INDBX

Pitt, William, 259
Poland, 197
Poor Laws, 43

Population, theory of; Malthus, 20-2,
26; Ricardo, 22-3

Poverty, in Asia, 21; elmunation of,
257-9; inequality, 39-41, 59; man’s
normal lot, 1-2; in Marshall’s day,
251-2; minimum income, 256-7;
political economy, of 255; produc-
tion, 76, 220, 252, 255-6, 259; in
public services, 195; root of economic
attitudes, 3, 4; Social Darwinism,
45-6; today, 253-5, 259; in West, 4
Poverty, case, 253-4, 255, 258
Poverty, insular, 254-5
Price control, 79, 82, 137, 175, 192-4,
238

Prices, 87, 198; administered, 169, 170;
bank rate, 176; business cycle, 82;
C.G.C., 236, 237; in competitive
industries, 169-71, 187 n.; in com-
petitive market, 174, 183-4; deter-
mination, 1 13; discrimination, 82;
farmers, 35, 82-3, 86, 88, 89, 92;
fiscal policy, 187, 190-2; interest rate,
179 n.; monetary policy, 179, 182,
183, 185; money supply, 180; mono-
poly, loi; in 19th century, 165;
oligopoly, 168, 171, I74f 183; in
peacetime, 165; setting by business,
79-80, 81, 167-8; Steel industry, 171;
wages, 171, i74-5t 192, 231; since
World War 11, 164. See also Inflation
Privately produced goods, balance in,
197-201, 240; vs. pubh'c services,
104-8, 139, 163, 195-7. 207-8, 210,
241; sales tax, 245-6; wealth of,

195-7

Production; 59, 195, 218-20, 221-2,
225-6, 238, 248, 259, 260-1, 264,
225-6, 272, 274, 276; balance in, 197.
203; business executive, 142-4, 146;

285

conservatives, 76, 154; consumer
debt, 157-8, 162-3, 216-17; con-
sumer wants, 120-5, 131; controls,
192-3; dependence effect, 124, 125,
132; diminishing marginal utility,
1 1 3-17; economic growth, 210;
economic security, 88-91, 92-3, loi,
154-5, 232; economic theory, iio-ii,
124; education, 216; excess, 97; fiscal
policy, 189-91; in Hamburg, 126-8;
happiness, 273; importance of, 96,
120, 153; income, 74-6, 109, 227-8,
241-2; inequality, 62; inflation, 167-
168, 175; interrelation of products,
197-8; Keynes, 147; labour force,
98, 100, 103, 155, 167; liberals 146-
151, 154; loss of, 91-3, loi, 103, 107,
147; military power, 136-9, 154;
monetary policy, 181-3; national
security, 151, 154, 273-4; in peace,
103, 107, 131. 134; politics, 148, 155;
poverty, 259; preoccupation with,
93-4. 97. 102-3, 108, 109, 151;
prestige of goods, 151, 154-5. I97;
private goods and public services,
104-8, 139, 163, 195-203, 207; re-
search, 100, 214-16; sales tax, 249;
social balance, 200, 203-4, 216, 259;
social security, 158; unemployment,
93. 155, 229-30; in war, 103, 131-4,
136-8, 148; ways to increase, 98-9,
103, 107, 147. See also Gross National
Product

Profit, and price regulation, 79-80;
rate of, 57; Ricardo, 22

Proust, Marcel, 152

Public services and advertising, 203,
209; attack on, 207-9; consumer
debt, 163; cost of, 207; federal ap-
propriations for, 204; housing, 201;
inflation, 188, 207; poverty in, i95-<5.
240; private goods, 195-6, 198-9.
207, 2X0, 241; production, 162-3;

286

INDEX

prosperity, 201-2, 250; social balance,
198, 199, 200, 203, 207-8, 240, 244-6;
taxes, 207

Public spending, 53, 160, 162, 188; and
fiscal policy, 186-7; Keynes, 147;
socialism, 106; unemployment, 186
Public welfare payments, 92
Public worker, and inflation, 205-6
Public works, 52
Pure competition, 167
Puritan ethos, 224, 233; modem
merchandising, 156

Radio Corporation of America, 9
R.A.F. Bomber Command, 126,
127

Randall, Clarence B., 10 n., 88 n.
Recession, 34
Rembrandt, 70
Republicans, 95, 237
Resources, 277; human, 212-16, 245,
248; for public use, 249
Ricardo, David, 20-6, 27-30, 36-40,
41. 43. 49. 50, 53. 61-2, 74. 84. 94.
96, 114, 125, 153
Robinson, Joan, 52 n., 57 n.
Robinson-Patman Act, 81
Rockefeller, Jolin D., 29, 46
Rolling readjustment, 34
Roosevelt, Franklin Delano, ii, 13, 43,
147, 148 n.

Roosevelt Administration and bal-
anced budget, 13; New Deal, 43, 71,
83, 133, 221
Ruskin, John, 50
Russell, Bertrand, 272 n.

Russia, 112, 128, 275; technological
advance in, 100, 137 n., 213 n., 274

Sales tax, 204, 245-9, 251
Salter, Sir Arthur, 56
Samuelson, Paul A., 117 n., 192 n.
Sarasota, 96

Scandinavia, housing, 201; social in-
surance, 85

Schlesinger, Arthur M. Jr., xi, 13 n.
Schumpeter, Joseph A., 35, 52 n., 55 n.,
57 n.

Scientific research, 214, 276. See also
Technological advance
Secretary of Defence, 274
S^, Henri, 11 n.

Sismondi, Leonard, 51
Smith, Adam, ii, 18-20, 21, 23, 24, 27,
37. 39. 51. 56, 113

Social balance, 198-203, 210, 240, 249;
and Congress, 204; in consumption,
216-17; definition of, 198; depen-
dence eflect, 202; education, 217,
245; federal government, 204-5, 208,
243; housing industry, 200-201;
inequality, 203; inflation, 203, 205-6,
228; investment in people, 258; local
governments, 205, 245; Los Angeles,
199; produaion, 200, 203-4; pros-
perity, 247, 250; taxes, 203-5, 243-8
Social Darwinism, 43-50, 59
Social insurance, ii; old age, 78, 81, 92;

unemployment, 78, 81
Social security, 78, 81, 147, 162, 186 n.,
216, 228

Socialism, 34, 50, 106, 152, T58
Soil bank, 221
Solomon, Robert, 170 n.

South America, 72, 74, 206
Soviet Union. See Russia
Spencer, Herbert, 44-7
Sraffa, Piero, 22 n.

Standard Oil Company, 29, 46
Stigler, G. J., 29
Stock market, 34, 80
Strachey, John, 56, 57 n.

Stuarts, 242
Subsidies, 102

Sumner, William Graham, 45, 46, 47
Supreme Court, 45

INDEX

Survival, 273-5

Sutton, Francis X., 104 n., 144 n.
Swados, Harvey, 268 n.

Sweezy, Alan, xi
Swigert, Ernest L., 63 n.

Switzerland, 130

Tariffs, 75, 79. 101-2
Taussig, Frank W,, 28, 30
Tawncy, R. H., 62, 96, 195
Taxes, 64-^, 186, 205-6, 208, 222,
241-3, 246; capital gains, 66, 244-5;
consumer debt, 162; depletion allow-
ance, 66, 245; distribution of income,
64, 66, 189; equality, 64-7, 189; by
federal government, 204-5; govern-
ment spending, 148; inflation, 178-9,
246; production, 109; public ser-
vices, 207, 242; salt tax, 246-7; social
balance, 203, 205, 243-4; in states and
locally, 205, 245-6. See also General
Property tax. Income tax. Sales tax
Technological advance, 107, 146, 210,
276; investment in, 99, 21 1, 248,
276-7; in modem industry, 211-12;
19th century, 211; in peace, 103; in
war, 103
Tennessee, 85
Tennessee Valley, 255
Third Reich, 127
Thirty Years’ War, 17, 126
Tobin, James, 104 n.

Trade associations, 81
Trade unions, 6, 11, 27, 32, 41, 45, 69,
75, 80, 81, 88, 91. loi, no, 147. 167 n.
169, 190, 222, 230, 234-5. ^38. 256,
268 n.; and inflation, 172; wage in-
creases, 172, 173

Treasury, Department of the, 137

Unemployment, 91, 158, 193, 236-7;
automobile industry, 159; C.G.C.,
231-7; federal responsibility, 233,

287

234; fiscal policy, 190, 236-7; Great
Depression, 147; inflation, 174; in-
surance, 88; Keynes, 165, 186; as
political issue, 93

Unemployment compensation, 89, 92,
228-35, 264; payments in 1956,
228

United States, affluence in, 48, 251;
agriculture, 89; inequality as econo-
mic issue, 64; national output, 98;
New Class, 268; poverty, 259; Presi-
dent of, 143; production, 89-90;
social legislation, 45; taxation, 246-7;
wages, 20-1, 26, 205-6
United States Chamber of Commerce,
6, 96

United States Department of Com-
merce, 66 n.

United States Steel Corporation, 9, 69,

143

United States Strategic Bombing Sur-
vey, 128 n.

Vanderbilt, Cornelius, 210
Vanderbilt, William H., 71
Vanderbilt, Mrs. William K., 45
Vcblcn, Thorstein, 40, 41-3
Veld, 26
Versailles, 45

Villard, Henry H., loi n.

Voltaire, ii

Wage control, 192-4; inflation, 174-5,
238

Wage-price spiral, 171-2, 174-5, I79.

193; and controls, 238
Wages, Carey’s view, 38; fiscal policy,
187, 192; inflation, 169, 171, 174,
205-6, 231; marginal productivity,
27, 28, 29; Marshall, 27; minimum,
29; monetary policy, 179; prices, 171,
172, 174-5. 192-3, 230-1; of public
worker, 206; in steel industry, 171-2;

288

INDEX

Taussig, 28-9; unemployment cx>m-
pcnsation, 228-35; unions, 171, 174;
See also Iron law of wages
Wages fund, 27
Waldorf-Astoria, 45
Wallich, Henry C., 75 n.

Want creation and monetary policy,
180-1; inflation, 181; social balance^
202-3, 207, 218. See also Dependence
effect

Washington, 8, 69, 133
Watt, James, 21 1

Wealth, inequality of, 30, 46; in pri-
vately produced goods, 195-200; and
social and political prestige, 68-73;
U.S. foreign policy, 139-40; Veblen,
41. See also Affluence
Webb, Beatrice, ii
Webb, Sidney, ii
Weimar, 219

Welfare state, ii
West Virginia, 254
Whitney, John Hay, 72
Wiles, Peter, 129 n,

Wilson, Charles £., 138

Work, conditions of, 262, 265-6, 269;

enjoyment, 266, 268; leisure, 264
Workers, and inflation, 206; malinger-
ing, 90, loi, 229, 298; 19th-century
England, 102; search for economic
security, 80, 82, 83-5, 86; unemploy-
ment compensation, 230-5
Work week, 237, 260-1, 262
World War I, 17, 34, 103, 129, 130 n.
World War II, 17, 65, 89, 103, 126-9,
130, 133-6, 157, 164, 174, 178, 187.
195-204, 207, 231, 266
Wyllic, Irving G., 225 n.

Yale University, 45

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